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Joseph Stuber
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Joseph has been an analyst, investor, and student of economic theory; money and banking; and statistical methods for evaluating and implementing risk/reward trading algorithms since 1972. Joseph is also an occasional contributor to financial publications and his essays are frequently cited by... More
  • The Fed's Betrayal Of The Middle Class 31 comments
    Jan 2, 2014 9:09 AM

    In September of 2012 the Fed announced a new QE program - QE3. It didn't make sense to me that the Fed would be adding more liquidity to a banking system that was already overflowing with liquidity. At that point it was obvious to me that Fed policy had little to do with rejuvenating the economy.

    (click to enlarge)

    There had to be a reason the Fed was continuing to inject liquidity into the system but the reason clearly had nothing to do with stimulating economic growth through private sector credit expansion. The banks didn't need the liquidity to expand M2 through private sector loans and even if they did need it they weren't using it to expand M2 through private sector loans. That is a fact and demonstrated by the excess reserves chart above.

    I reasoned that the Fed was simply assisting the government by becoming THE buyer of US Treasuries and Congress was attempting to stimulate economic growth through fiscal programs that were in fact injecting money into the economy through massive deficit spending. This too is a fact as demonstrated by the chart below.

    (click to enlarge)

    It was obvious to me as it should be to everyone that continuing to borrow money to maintain the status quo wasn't a sound or sustainable policy and that at some point it had to stop. The debt to GDP ratio was soaring and that meant the massive debt burden had to have a dampening effect on economic growth - not a stimulative effect. And we were just maintaining the status quo as we sure weren't reaching economic escape velocity. The Debt to GDP ratio had finally moved to 100% as the chart below indicates.

    (click to enlarge)

    At some point the economy had to take off on its own and that meant money velocity had to spike higher and credit creation had to spike higher. We also should have seen modest increases in inflation. None of those things were occurring though so why did the Fed continue to inject massive liquidity into a system that wasn't responding to its efforts?

    The chart below shows that both large and small banks have not expanded credit significantly since the recession with the small banks doing just a little more and the large banks a little less. Suffice it to say that credit creation has been marginal at best in spite of the Fed's stimulus.

    (click to enlarge)

    We rarely see a period on the chart above where bank credit flat lined as it has since the end of the recession yet the Fed continued to inject liquidity - liquidity that wasn't being used to stimulate economic growth. The chart below of cash assets for large commercial banks is extremely telling and not a metric to be ignored.

    (click to enlarge)

    Why the huge surge in cash assets held by large banks? Equally telling and a question that begs an answer - why are corporate checking account balances surging as well?

    (click to enlarge)

    We just don't see anything in history that is remotely close to what we've seen since the recession as it relates to the build up in cash assets. Why isn't this cash being invested? Isn't that what the investment industry tells us we must do - invest our cash as simply holding it is a fools play?

    Honestly these metrics are screaming at us to think - to ask why is this time different - but we aren't doing that? Instead many of us are laughing at those who sound warnings and we are relishing in our new found riches as the stock market has moved higher and higher while the economy has remained stagnant at best.

    We are assuming that this time really is different and the Fed has taken over the markets and virtually guarantees us a profit if we just keep investing our cash in stocks. If that were so then why the huge cash build up by the Fed's bank members? Did the Fed fail to get the message out to the big banks that sitting on cash is a fools play? Did they fail to get the message out to the companies we are investing in and even using massive levels of margin to leverage our plays?

    These are reasonable questions and questions that I wanted answered. The truth is we aren't growing the economy much and we have no period in history where we've employed such massive fiscal and monetary stimulus without seeing positive results in traditional economic metrics.

    I finally came to the point where I had to ask myself - who is the Fed really working for? After all the Fed clearly knew that massive deficit spending supported by central bank asset purchases doesn't work to produce economic recovery. We have Japan as a model. Here is Japan's experiment in trying to keep the economy afloat on the back of public debt. The first chart shows the massive debt accumulation over the last 18 years and the second chart shows Japan's GDP.

    (click to enlarge)

    (click to enlarge)

    All one can say is that this isn't a good plan and for obvious reasons. Economic growth is dependent on consumer spending to purchase goods and services and consumer spending is severely hampered by the tax burden created by the increase in public debt. This is just common sense - not a sophisticated and esoteric theoretical concept that only the Fed understands. In other words it is extremely naive to assume that the Fed is just misguided and I don't for a moment believe that. And that leaves me again asking the question - what the hell are they trying to do?

    That led me to consider the whole matter of the Great Recession in the first place. Just how serious a problem was the mortgage crisis as it relates to bank solvency?

    (click to enlarge)

    The too big to fail banks really didn't have that much exposure to mortgage backed securities at the start of the recession as the chart above reflects. To put the matter in better perspective the following chart shows mortgage backed securities plotted against total assets of large banks.

    (click to enlarge)

    Here is the point - the mortgage crisis never was the problem and the charts above support that view. The banks just didn't have a crisis level exposure to mortgage backed securities. That doesn't mean there was no crisis though as there clearly was but it wasn't the banks exposure to mortgages that caused the crisis. To the contrary - it was the banks counter party exposure to massive bets in credit default swaps that caused the crisis but it never was a crisis that threatened the big banks in any event.

    That problem was resolved by bailing out AIG. Here is an excerpt from an article entitled The AIG Bailout Scandal and one of the best explanations of what occurred that I have found on the matter:

    The government's $182 billion bailout of insurance giant AIG should be seen as the Rosetta Stone for understanding the financial crisis and its costly aftermath. The story of American International Group explains the larger catastrophe not because this was the biggest corporate bailout in history but because AIG's collapse and subsequent rescue involved nearly all the critical elements,including delusion and deception. These financial dealings are monstrously complicated, but this account focuses on something mere mortals can understand-moral confusion in high places, and the failure of governing institutions to fulfill their obligations to the public.

    Remember that the pitch to the public was that the too big to fail banks were at risk of collapse and that is utter nonsense. Here is another excerpt from the above referenced article:

    The five-member COP, chaired by Harvard professor Elizabeth Warren, has produced the most devastating and comprehensive account so far. Unanimously adopted by its bipartisan members, it provides alarming insights that should be fodder for the larger debate many citizens long to hear-why Washington rushed to forgive the very interests that produced this mess, while innocent others were made to suffer the consequences. The Congressional panel's critique helps explain why bankers and their Washington allies do not want Elizabeth Warren to chair the new Consumer Financial Protection Bureau.

    The report concludes that the Federal Reserve Board's intimate relations with the leading powers of Wall Street-the same banks that benefited most from the government's massive bailout-influenced its strategic decisions on AIG. The panel accuses the Fed and the Treasury Department of brushing aside alternative approaches that would have saved tens of billions in public funds by making these same banks "share the pain."

    What in the world were they talking about - making the big banks "share the pain"? Weren't the too big to fail banks on deaths doorstep? How were they going to share the pain - didn't they need bailouts in order to avoid financial collapse themselves?

    Let's continue with the articles logic:

    Bailing out AIG effectively meant rescuing Goldman Sachs, Morgan Stanley, Bank of America and Merrill Lynch (as well as a dozens of European banks) from huge losses. Those financial institutions played the derivatives game with AIG, the esoteric practice of placing financial bets on future events. AIG lost its bets, which led to its collapse. But other gamblers-the counterparties in AIG's derivative deals-were made whole on their bets, paid off 100 cents on the dollar. Taxpayers got stuck with the bill.

    I think the above statement needs a little clarification. The banks made big bets with AIG by betting that a credit risk existed on the mortgage backed securities that they owned. In other words they were making bets that the assets they owned would go into default and trigger a credit event. If so then AIG had to pay off on the bets and they couldn't do so. It can even be argued that the big banks had made bets that were much larger than their actually holdings of mortgage backed securities - in other words they were real bets and not hedges against risk exposure.

    Why would that be significant if true? Well if I bet with you on the outcome of the Superbowl and I win and you lose then you owe me. If you don't pay me then I am cheated out of my due but no worse off than I was before the bet. In this case it can be argued that the big banks were at risk for the cost of the CDS's they had paid to AIG but that was minimal in relative terms and certainly not a threat of such magnitude that it would collapse the banks.

    In fact Tim Geithner went to the big banks and explained that they needed to assume the role of financier in bailing out AIG. Why - one wonders - if the too big to fail banks were on the verge of failing would the Fed go to them with a request to lend the money needed to bail AIG out? That is certainly what happened as explained here:

    In the early autumn of 2008, mayhem swept through global financial markets. It engulfed AIG on Monday morning, September 15. Lehman Brothers had just failed. Panicky credit markets were seizing up. American International Group, largest insurance company in the world, was hemorrhaging capital, rapidly sinking toward bankruptcy. At the New York Fed, Geithner had the problem covered, or so he thought.

    Geithner informed top executives of Wall Street's most important financial houses-Jamie Dimon of JPMorgan Chase and Lloyd Blankfein of Goldman Sachs-that the banking industry, not the Federal Reserve, must step up and do the rescue. Geithner told them it was "inconceivable that the Federal Reserve could or should play any role in preventing AIG's collapse."

    That Monday morning, Geithner summoned representatives from Goldman and the JPMorgan bank to Fed offices and told them to organize a private-sector consortium of major lenders to provide the emergency liquidity loans that would keep AIG afloat until things settled down. It was presumed JPMorgan would be the lead lender; Goldman, as an investment bank, could help AIG sell off assets to raise capital. Given the Fed's blessing, other banks were expected to cooperate.

    Sometime after midnight, the bankers called to say, sorry, they were not interested. There would be no private-sector rescue. According to Thomas Baxter, general counsel at the New York Fed, notification came on Tuesday morning, not from the principal executives of Goldman and JPMorgan but from a bankruptcy lawyer, Marshall Huebner, advising JPMorgan on AIG's problems. The New York Fed immediately hired him as its own lawyer and proceeded to do what the bankers had refused to do-bail out AIG.

    JPMorgan and Goldman offered no public explanation for rejecting Geithner's proposal. The public wasn't ever told the banks were asked to do their part. Nor did Federal Reserve officials argue with the decision or try to apply persuasive pressures. It did not put the squeeze on to convince the bankers they must accept some kind of sacrifice in the interest of sharing the pain. Nor did Geithner threaten to pursue an alternative strategy that could have forced the banks to negotiate the terms. This was considered out of the question, though the central bank has employed all these tools on past occasions.

    So all this again begs the question - who was the Fed working for back in 2008? Even more to the point who was running the Fed in the first place. Keep in mind that a bail out of AIG by the big banks would have gotten the banks their money from the derivatives bets and the odds were reasonable that AIG would eventually pay the loans back with interest. In other words the real risks to the banks were minimal yet they refused to make the loan. Why?

    In the end it didn't matter as the Fed did step in as did Congress:

    Morgan Stanley, another investment bank that had its own near-death experience in the fall of 2008, got a similar though much smaller benefit while also acting as adviser to the Treasury Department. The Federal Reserve provided both Goldman and Morgan Stanley with shelter from the storm by designating each as a "bank holding company," even though neither owned many retail banks. The status gave them access to emergency loans at the Fed's discount window-just in case.

    JPMorgan Chase was vulnerable in a different way. It was not a counterparty holding AIG derivatives, but the Morgan bank was itself the banking industry's largest issuer of derivatives. It held $9.2 trillion in credit derivatives-four times its capital assets-and many trillions more in other forms of derivatives. By its actions, the Fed greatly reduced the risks for the Morgan bank.

    Certainly most of this is not a surprise to readers and no doubt many do question the Fed's loyalty but keep this point in mind - the Fed has done little if anything to generate economic growth over the last 5 years but they have done much to assist their owners in getting even bigger than they were before.

    That truth has led me to reconsider my views as it relates to the Fed and to the whole idea of privately owned central banks and the exorbitant privilege these banks are afforded by the fractional bank credit creation scheme. I have been led - reluctantly - to consider the possibility that the central bank/fractional reserve system is designed to enrich and empower an elite group at the top of the social strata and at the expense of the middle class.

    You see I have never - until recently - even considered the idea that the system was structured to work to the detriment of the middle class. I was educated to understand the benefits of the system and had no reason to consider any other possibility. That said, the Fed's actions since the recession make no sense to me if the idea is that the Fed is working to stimulate the economy and benefit the middle class as they claim. It does make sense to me if the goal of the Fed is to strengthen and consolidate power in the hands of a few banks at the top.

    It has sent me on a quest for understanding and that has led me to investigate the history of the Fed and more specifically the idea of privately owned central banks. I don't want to bog down on this but the history of central banks is tumultuous at best. In fact there are some who assert that President's Lincoln and Kennedy were assassinated for working to dismantle the whole credit creation scheme that affords the banking system such incredible power.

    Both of these president's moved directly against the fractional bank system that allows banks to create money out of thin air and lend it out or invest it to their own benefit. Lincoln did it with the "greenbacks" that he issued through the Treasury when the banks demanded interest rates in the 25% to 30% range if they were to loan money - money they would create out of thin air - to finance the cost of the Civil War. Kennedy did the same thing - albeit on a much less significant scale - with the issuance of "silver certificates" - money created by the US Treasury and therefore money creation that bypassed the banking system.

    In the case of Kennedy there is a very plausible debunking effort set forth that seems credible but the truth is that Kennedy did have issues with the idea of a privately owned central bank system. Additionally Kennedy had sounded a warning against secret societies establishing himself as an enemy of those globalist elites and the secret societies they were a part of. Here is what Kennedy had to say on the matter:

    We are as a people, opposed to secret societies. The dangers of excessive and unwarranted concealment of pertinent facts, far outweigh the dangers that are cited to justify them. There is a very grave danger that an announced need for an increased need for security, will be seized upon by those anxious to expand it's meaning to the very limits of censorship and concealment. That I do not intend to permit, so long as it's in my control.

    Kennedy's words proved to be very prophetic in that today we are indeed relinquishing our freedoms under the guise that it is necessary in order to keep us safe and secure.

    Andrew Jackson had this to say on the matter of central banks:

    The bold effort the present (central) bank had made to control the government … are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it. I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country.

    Here is what Wikipedia says regarding Jackson's opposition to the idea of a central bank:

    The Second Bank of the United States was authorized for a 20-year period during James Madison's tenure in 1816. As President, Jackson worked to rescind the bank's federal charter. In Jackson's veto message, the bank needed to be abolished because:


    • It concentrated the nation's financial strength in a single institution,
    • It exposed the government to control by foreign interests,
    • It served mainly to make the rich richer,
    • It exercised too much control over members of Congress,
    • It favored northeastern states over southern and western states,
    • Banks are controlled by a few select families.

    Wikipedia goes on to explain the attempted assassination of Jackson:

    On January 30, 1835, what is believed to be the first attempt to kill a sitting President of the United States occurred just outside the United States Capitol. When Jackson was leaving through the East Portico after the funeral of South Carolina Representative Warren R. Davis, Richard Lawrence, an unemployed housepainter from England, aimed a pistol at Jackson, which misfired. Lawrence pulled out a second pistol, which also misfired. Historians believe the humid weather contributed to the double misfiring.[60] Lawrence was restrained, and legend says that Jackson attacked Lawrence with his cane. Others present, including David Crockett, restrained and disarmed Lawrence.

    Is there any reason at all to assume that the assassination attempt had anything to do with Jackson's opposition to the idea of a central bank? We will never know of course but it at least seems plausible.

    Wikipedia explains the reason for the assassination attempt this way:

    Lawrence told doctors later his reasons for the shooting. He blamed Jackson for the loss of his job. He claimed that with the President dead, "money would be more plenty" (a reference to Jackson's struggle with the Bank of the United States) and that he "could not rise until the President fell".

    So what exactly was Jackson talking about? Well, it is the idea that we as a people should not allow a cabal of private bankers to reap the rewards of creating - out of thin air - money which it then loans to the government to finance whatever initiative the government is set on pursuing. That is what has happened since the onset of the recession and in a way that is unprecedented. It is the biggest transfer of wealth in history from the middle class to the "moneyed aristocracy".

    Here is how it happened. In order to stimulate the economy at the depths of the recession and also to bail out the too big to fail banks the US government passed legislation designed to do both. Of course the government didn't have a surplus of cash to fund these programs and so they needed to raise the cash. Keep in mind the US Treasury has the constitutional right to create the money - out of thin air - and spend it to fund the programs just as Lincoln had done during the Civil War and Kennedy had done to a limited degree with his "silver certificates".

    That isn't what happened though. Instead the government went to the too big to fail banks - the Fed's primary dealer banks - and asked them to loan the government the money which they did by buying the US Treasuries the government issued. Keep in mind a lot of the money the US Treasury borrowed from the too big to fail banks was earmarked to go right back to those same banks under TARP. Look at it this way - the too big to fail banks needed to be rescued with financial bail outs and so the government went to those same banks to borrow the money they needed so they could turn around and give it back to them.

    The money the US Treasury has borrowed since the Great Recession - roughly $8 trillion - has been raised substantially through the private sector banks and the source of the money the banks have used is commercial and consumer banks deposits.

    Here is how it works - we give the banks our money in the form of deposits; the banks loan our money to the government at interest that the banks receive; and the government takes that money and gives it back to us in the way of fiscal stimulus programs and the issuance of government payroll checks which we put back in the banks until we spend it.

    When the government spends the money M2 increases as we take that money and put it in the bank. One can argue that the money will be spent but when it is spent it simply goes from one bank account to another but still stays in the banking system so in the aggregate M2 is and will remain larger by virtue of the money that the fractional bank system created when it bought interest bearing bonds with our money.

    We then spend it by buying goods and services from international companies. The net effect is that we as taxpayers now have $8 trillion in debt and the money was effectively transferred to large international corporations who have engaged in a process of laying off workers in order to enhance their profits. But now that we have the debt burden to pay off the government must raise taxes and that means we have less money to spend in the aggregate as each paycheck is now a little smaller as a result of the increased tax bite.

    That is a very simplistic presentation of the process but sufficient for now to make the point. Had the government elected to create the money themselves as Lincoln and Kennedy had done the one great advantage would be that there is no debt burden created and therefore no need to raise taxes to pay the debt off. The loser under this arrangement would be the banks and the winner would be the tax payer or to put it another way the middle class.

    Now keep in mind that the big banks and the international corporations know that this can't go on indefinitely as they know at some point the middle class tax payer will be so burdened with debt that they won't have any money left to spend for goods and services so why does this insane process continue if it is destined to fail at some point? And if you don't think they know this is not sustainable ask yourself why they are sitting on so much cash - both banks and international corporations.

    The globalist agenda - a New World Order

    Keep in mind my goal since the announcement of QE3 was to figure out why the Fed was continuing with a policy that was not working to improve the plight of the middle class and in fact was only transferring massive amounts of wealth to the big banks and the international corporations - corporations that the big banks and other mega financial institutions owned or controlled.

    The only answer I could come up with was the New World Order agenda of the global elitists. Here are a few quotes from these globalists that tend to shed a lot of light on the matter. Read these words carefully:

    We are grateful to the Washington Post, The New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years... It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But, the world is now more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.

    David Rockefeller, Bilderberg Meeting, June 1991 Baden, Germany

    In the next century, nations as we know it will be obsolete; all states will recognize a single, global authority. National sovereignty wasn't such a great idea after all.

    Strobe Talbot, President Clinton's Deputy Secretary of State, Time Magazine, July 20th, l992

    Today, America would be outraged if U.N. troops entered Los Angeles to restore order. Tomorrow they will be grateful! This is especially true if they were told that there were an outside threat from beyond, whether real or promulgated, that threatened our very existence. It is then that all peoples of the world will plead to deliver them from this evil. The one thing every man fears is the unknown. When presented with this scenario, individual rights will be willingly relinquished for the guarantee of their well-being granted to them by the World Government.

    Henry Kissinger, Bilderberger Conference in Evians, France, 1991

    The task we have now is to actually create a New World Order.

    Joe Biden, April 2013 speech to Export-Import Bank

    For more than a century, ideological extremists at either end of the political spectrum have seized upon well-publicized incidents to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as "internationalists" and of conspiring with others around the world to build a more integrated global political and economic structure - one world, if you will. If that's the charge, I stand guilty, and I am proud of it.

    David Rockefeller Memoirs

    That last statement from David Rockefeller can be re-worded in a way that makes its meaning even more clear:

    If the charge against me is that I am a part of a secret cabal working against the best interests of the United States by conspiring with other internationalists then I stand guilty of the charge and I am proud of it.

    At this point I am sure there are many who will move to label me a conspiracy theorist but keep in mind I am only offering direct quotes from political and economic leaders and not resorting to supposition. Of course I am also looking at the evidence since the Great Recession to see who has benefited and who has suffered from fiscal and monetary policy and again I am only giving you the data - all of it from the Fed's own website - and the data supports the agenda of the global elitists.

    Of course the American people are a formidable force and our sheer numbers suggest that the agenda of a few - if it works to our detriment - will fail. That is true if we are able to recognize the agenda and elect politicians that will defeat what must certainly be viewed as enemies of the middle class. But are we likely to recognize this agenda? Consider what Nathaniel Mayer Rothschild said back in 1912:

    The few who could understand the system (cheque, money, credits) will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests. Nathaniel Mayer Rothschild, 1912

    According to Rothschild the "great body of people" are "mentally incapable of comprehending" and those who do "understand the system will either be so interested in its profits or so dependent on its favours that there will be no opposition from that class". Make no mistake - most of us fall in that category of people who are so mentally deficient that we will be clueless to the fact that we are being sold out. The second group - that group who will derive benefit - are those in the political class that we send to Washington to look out for our interests and protect us against those who would seek to harm us.

    Some will take comfort in the fact that there are many in Washington today who are in fact pushing back. Elizabeth Warren perhaps or Ted Cruz or even Rand Paul - vocal critics of the status quo. For those who hold out hope let me direct your attention to the STOCK Act fiasco.

    It all started with Steve Kroft who did an expose on the TV show 60 Minutes on the matter of trading stock on inside information by members of Congress that led to the passage of the STOCK Act. STOCK stood for Stop Trading on Congressional Knowledge. The Act passed in the Senate by a vote of 96 to 3 and in the House by a vote of 417 to 2 in February of 2012.

    Keep in mind the US Justice Department had prosecuted and convicted Raj Rajaratnam for insider trading and other cases are currently pending and the idea that a double standard existed that exempted Congress from the laws the rest of us are subject to was brought to the forefront by Kroft and demonstrated the hypocrisy of our political leaders. Here's the President's disingenuous statement regarding special treatment of the political class:

    It's the notion that the powerful shouldn't get to create one set of rules for themselves and another set of rules for everybody else.... If we expect that to apply to our biggest corporations and our most successful citizens, it certainly should apply to our elected officials.

    Why do I say disingenuous - because a little over a year after the STOCK Act was passed Congress began the process of watering it down to the point where the substantive parts of the Act were effectively repealed. Under the guise of national security threats the public reporting of financial transactions was removed from the Act. The amendment to the Act that repealed the reporting provisions passed without a single dissenting vote in either the House or the Senate. Just business as usual in Congress and of course the President - despite his praise for the original Act - quickly signed off on its repeal.

    What bothers me the most is the phony idea that if the financial transactions of Congress; their staff; the President; and his staff were to be made public it would present a major security risk. Just as disconcerting is the fact that not a single member of the House or Senate registered a dissenting vote on the matter of the repeal of the reporting provisions and without accountability the Act was rendered inconsequential. Apparently Elizabeth Warren and Rand Paul - champions of the middle class and critics of the Fed - were OK with the idea of repealing the substantive portion of the Act as they didn't vote against its repeal.

    So much for holding out hope that our political leaders will stand in the gap against the global elitist cabals. As Rothschild so aptly put it those who do "understand the system will either be so interested in its profits or so dependent on its favours that there will be no opposition from that class".

    So what can we expect going forward

    Charles A Lindbergh, Sr was a staunch critic of the Federal Reserve and served as Congressman from Minnesota from 1907 to 1917. Here is one of many memorable quotes from Lindbergh in opposition to the Federal Reserve:

    To cause high prices, all the Federal Reserve Board will do will be to lower the rediscount rate..., producing an expansion of credit and a rising stock market; then when ... business men are adjusted to these conditions, it can check ... prosperity in mid career by arbitrarily raising the rate of interest. It can cause the pendulum of a rising and falling market to swing gently back and forth by slight changes in the discount rate, or cause violent fluctuations by a greater rate variation and in either case it will possess inside information as to financial conditions and advance knowledge of the coming change, either up or down. This is the strangest, most dangerous advantage ever placed in the hands of a special privilege class by any Government that ever existed. The system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money. They know in advance when to create panics to their advantage, They also know when to stop panic. Inflation and deflation work equally well for them when they control finance.

    The evidence over the years supports Lindbergh's position in that we have had 20 recessions since the passage of the legislation that authorized the Fed back in 1913. That works out to about one recession every 5 years on average as reflected by the gray bars on the Dow Jones (Private:DJI) chart below. You can argue that the Fed just lost control each time and their motives were always to support the middle class. I would suggest another possibility - their motives have always been to enrich the banks just as Lindbergh said they would.

    (click to enlarge)

    This quote from an anonymous author on the virtues of a constitutional republic versus a democracy seems apropos:

    Democracies always self-destruct when the non-productive majority realizes that it can vote itself handouts from the productive minority by electing the candidate promising the most benefits from the public treasury. To maintain their power, these candidates must adopt an ever-increasing tax and spend policy to satisfy the ever-increasing desires of the majority. As taxes increase, incentive to produce decreases, causing many of the once productive to drop out and join the non-productive. When there are no longer enough producers to fund the legitimate functions of government and the socialist programs, the democracy will collapse, always to be followed by a Dictatorship.

    The last two sentences are the ones that are relevant as it relates to the New World Order agenda and the following chart of the labor force participation rate show that the "once productive" people are in fact just dropping out:

    (click to enlarge)

    Here is what we know - each president going back to George HW Bush has been supportive of the New World Order agenda and they are all on record on the matter. It seems reasonable to argue that the whole agenda moved into high gear after the repeal of Glass-Steagall by Clinton in 1999.

    The biggest mistake I have made in the last 15 months is to assume the Fed would lose control of the markets at some point. I no longer believe that to be true. In fact I am convinced at this point that all technical and fundamental analysis is totally useless in terms of forecasting the next crash.

    The next crash - in my opinion - will come about at such point in time as the Fed and those who control the Fed decide the time is right and not a day sooner. I am also convinced that the next crash will be even more devastating than the last 2 crashes of this century and will vest even more power and control in these global elitists.

    Perhaps the biggest clue of all as it relates to timing is the sharp increase in the cash positions of banks and international corporations in 2013 - corporations that have no sovereign allegiance. Daniel Estulin thinks the goal of these New World Order elitists is to deal a final death blow to sovereign governments by bankrupting them and then offering a solution - a New Bretton Woods system and a New World Order.

    Who will run the New World? Well, this is how David Rockefeller explained it back in 1991:

    The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.

    Henry Kissinger used these words - also in 1991:

    When presented with this scenario, individual rights will be willingly relinquished for the guarantee of their well-being granted to them by the World Government.

    And this from Strobe Talbot - President Clinton's Deputy Secretary of State - in 1992:

    In the next century, nations as we know it will be obsolete; all states will recognize a single, global authority. National sovereignty wasn't such a great idea after all.
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  • The_Hammer
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    Joe you are going to be called a fringe lunatic. a must read for every American.
    why is china acculmulating massive amounts of gold? why are the big bullion banks real long gold futures now?
    2 Jan 2014, 09:26 AM Reply Like
  • Joseph Stuber
    , contributor
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    Author’s reply » Hammer


    I just made the same comment to one of my readers. I am now on record as a bona fide conspiracy theory kook.


    Oh well - that's the risks we take. Believe me I don't like going there but I do understand the effects of QE and it certainly hasn't been a policy that has helped the middle class - at least from the standpoint of the long term.


    I am a bit of a physics nut as well and read an article on Stephen Hawking on the idea of time travel recently. Hawking says it is theoretically possible and then goes on to make this statement:


    “Time travel was once considered scientific heresy, and I used to avoid talking about it for fear of being labelled a crank.


    These days I’m not so cautious.”


    I readily admit Hawking inspired me to say what I think regardless of consequence. I will add that I have only recently come to this conclusion and then only based on a lot of research.


    2 Jan 2014, 09:58 AM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1740) | Send Message
    Author’s reply » Hammer


    I am not the only one though. Here is an excerpt from a ZH article on the Fed's control of the market:


    "So in the spirit of the holidays, and since nobody even pretends anymore that Mr. Yellen's only mandate is to push stocks higher, will the Fed finally be kind enough to release a newsletter each morning laying out where the S&P will close that day? The Fed could use the monthly $29.95 subscription fees toward paying for Kevin Henry's et al Bloomberg terminal and REDI fee."


    2 Jan 2014, 10:04 AM Reply Like
  • retpdguy
    , contributor
    Comments (205) | Send Message
    intriguing article. How about inflation which is supposedly non existent. Are we the next Weimar Republic.
    2 Jan 2014, 11:10 AM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1740) | Send Message
    Author’s reply » retpdguy


    My guess is that we see a weaker dollar but not inflation which doesn't make a lot of sense if you rely on the textbooks for an explanation. Specifically we know that China is pushing back against the US with bilateral trade agreements with everyone. We also know they aren't in the market today as in times past for US Treasuries and for obvious reasons - they aren't burdened as much with the need to deal with US dollars as they are no longer receiving them in large quantity due to bilateral trade agreements that bypass the dollar.


    We could actually see a huge bulge in dollars in the domestic economy from this dynamic. I don't think we will see it from credit expansion though as many fear. The banks are hoarding cash - not lending it - and M2 won't move dramatically higher if this situation persists.


    This stuff is indeed a little esoteric and clearly not as obvious as most think it is. The Fed's QE has only inflated risk assets to date and how this has been accomplished is explainable but not here as it would take a lot of space.


    My guess is we see a falling dollar at the same time we see deflation and that is just not explained in the text books. Of course it is fully dependent on how the dollars and dollar assets are disposed of as the US loses it's grip on the matter of the US dollar remaining the worlds reserve currency.


    That said I am a gold bull and think it is the best play over the course of the next few years. Don't know when it starts to climb as that seems clearly under the control of those manipulating the markets but I do think it will climb to new all time highs in the next few years.


    2 Jan 2014, 11:40 AM Reply Like
  • The_Hammer
    , contributor
    Comments (5052) | Send Message
    joe, what happens when all those dollars/dollar based assets floating around the world become a glut due to less trade/need for dollars and if/when China (largest importer of oil) buys oil from Saudi Arabia in yuan/gold (speculation)? Hint, the excess dollars have to go somewhere.
    2 Jan 2014, 11:50 AM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1740) | Send Message
    Author’s reply » Hammer


    That's my point - those dollars do have to go somewhere and it seems to me they go to PM's. Stocks won't be that attractive nor will Treasuries.


    Seems logical that at some point we go through a deleveraging process and at that point the banks may well open up the credit spigot and that is when you would see widespread inflation. One thing for sure - the excess liquidity in the system would allow for a huge surge in M2 if the banks begin to lend aggressively as they will probably do at some point but not at these prices. We need to see a crash in stocks, bonds and real estate before the perception of value is there to encourage banks to start lending.


    2 Jan 2014, 11:57 AM Reply Like
  • The_Hammer
    , contributor
    Comments (5052) | Send Message
    Joe, Did you notice from links the Big banks are getting real long gold now?
    My best guess is they are allowing china to buy up gold on the cheap then there will be an across the board currency devaluation against gold. CBers do not want to give up their powers but will bring gold back into the system imo.
    2 Jan 2014, 12:00 PM Reply Like
  • glaserdx
    , contributor
    Comments (273) | Send Message
    Joseph-your article could be an update to "Creature from Jekyll Island" which I love. Suggestions for how we mentally challenged should act?
    2 Jan 2014, 01:10 PM Reply Like
  • tampat
    , contributor
    Comments (1378) | Send Message
    Thanks for the article JS, a lot of interesting information that I have read bits and pieces of in a variety of different places. You did a good job putting it all together in one place.
    So how does this effect your investment plans or does that require another article?
    2 Jan 2014, 01:36 PM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1740) | Send Message
    Author’s reply » Tampat


    My investment strategy has been pretty consistent for about 15 months. I have taken a very small amount of cash in relative terms and bought puts in specific stocks and ETF's.


    The strategy has been a loser to date. It is one of those strategies that produces a string of small losses and hopefully one really big winner. Of course the main part of the strategy is to first and foremost protect capital and that means most of ones money should be in cash.


    I do like gold as a medium term play but not currently invested there. I really like my short play on Priceline and think this stock could have some serious problems going forward. A lot of Priceline business is euro based and I think there are a number of issues in the eurozone that could end up being a negative for Priceline.


    I think we could see Priceline trading at 650 to 700 in the next few months and perhaps without a major crash in the broader market.


    2 Jan 2014, 01:51 PM Reply Like
  • The_Hammer
    , contributor
    Comments (5052) | Send Message
    Deflation is not in the Feds or CBers playbook. Met with a friend, high level bulge bracket position (near the top position now) in June 2009, he said that 5% inflation would solve our debt problem in 15 years. Back in late 2008 I spoke with him and he was talking about getting a gun and potential societal uprising.
    2 Jan 2014, 02:11 PM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1740) | Send Message
    Author’s reply » Hammer


    Well if I were part of an evil cabal that desired to acquire even greater control over the masses I would create deflation to the extent I could do so. Assets crash at which point they are bought up by those holding cash and then they reflate driving the price of those assets higher. Wasn't it Rockefeller who said the time to buy stocks is when there is blood in the street.


    Hard to say what is in the cards but it honestly looks to me like the Fed is purposely creating a deflationary situation. Disinflation is the reality today and deflation is very close. One can assume this is unintended and not what the Fed wants but I'm not so sure I buy that.


    2 Jan 2014, 02:19 PM Reply Like
  • The_Hammer
    , contributor
    Comments (5052) | Send Message
    Joe the Fed wants u to believe there is deflation or disinflation. Prices are going up big time on assets (although I think asset prices are high now and are due for a major correction at some point--this is not deflation) and everyday items are going up in price. Healthcare, education housing all bloated and overpriced. The Bernank helped refi all the debts so for now debt interest expense is manageable. Also consumer debts are now expanding again.
    page 3 consumer credit up 6%. mtgs up 0.9%. still not back to peak levels for mtgs but growing again.Consumer credit is at record levels! Gr888t news.
    Corporations at record high credit levels. Borrow and spend for debt refi'ing and buybacks pumping eps.
    $58 trillion in total debts and growing. I have underestimated these Fed stooges in the past. Watch actions and listen to comments of Buffett. He has inside scoop and has been preparing for higher inflation.
    2 Jan 2014, 02:35 PM Reply Like
  • The_Hammer
    , contributor
    Comments (5052) | Send Message
    “We intend to continue to do as well as we can in managing the internal affairs of the business. But you should understand that external conditions affecting the stability of currency may very well be the most important factor in determining whether there are any real rewards from your investment in Berkshire Hathaway.” (source: Buffett, Warren. 1979 Berkshire Hathaway Letter to Shareholders. March 3, 1980. page 3.
    2 Jan 2014, 03:31 PM Reply Like
  • Jonny Tellyarn
    , contributor
    Comments (89) | Send Message
    Provocative as always, Joseph.


    It confuses me when I hear people say that the Federal Reserve Bank misbehaves by serving the interests of its banker-owners rather than the interests of the people.


    The way I understand it, the Fed is supposed to be independent. I interpret that to mean that it is supposed to act like a bank. Banks must make a profit. They work for their own interests, not someone else's.


    For the Fed, what this means is that it can print as much money as it wants so long as the new money is backed by unquestionably good collateral. If the Fed takes lousy collateral, like bags of sand, then it is not behaving like a real bank. We need Fed independence because we all know that the "people" will always be clamoring for money in exchange for bags of sand. But it is really in the peoples' best interest that the Fed NOT do that, because we all know what happens to our society if it did. It is necessary tough love -- the Fed must say no. We are best served if the Fed puts its banker-owners first, are we not?
    2 Jan 2014, 08:01 PM Reply Like
  • The_Hammer
    , contributor
    Comments (5052) | Send Message
    johnny that's why our bankster friends were leveraged 30-40 to 1 since they had the backing of the treasury standing behind them. if these banksters were part of a partnership whereby their own assets were at risk things would be a whole lot different. sounds like a system for the people all right.
    2 Jan 2014, 08:48 PM Reply Like
  • Garimpiero
    , contributor
    Comments (34) | Send Message
    "At that point it was obvious to me that Fed policy had little to do with rejuvenating the economy."
    The only cabinet-member to wind up in jail, Albert Fall (of Teapot Dome Scandal notoriety) went down for accepting an interest-free loan ($1 million from Sinclair Oil to grease the skids for their drilling in the strategic naval petroleum reserve.)
    Today, the Fed is making trillions available, nearly interest-free to the very banks that own it. Perhaps they are in no rush to use it- it isn't costing them much. Joseph, does this ring any bells?
    2 Jan 2014, 11:02 PM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1740) | Send Message
    Author’s reply » For those who don't seem to understand the mechanics of QE and assume the Fed is printing money - that is simply not true. QE means the Fed buys an interest bearing asset - perhaps a 10 yr Treasury that is currently earning about 3% and they do it with a credit to the banks reserve account at the Fed. The Fed pays interest on those reserves at the rate of .25%.


    Point being at that stage of the QE process M2 does not increase and the bank trades a high interest instrument for a low interest instrument. Not a good deal at all for the bank if it stops there but it doesn't.


    The Fed is not making trillions available to the banks through QE. What they are doing in the first stage of the process is trading a less liquid asset for a completely liquid asset. The banks can then use that cash (reserves) to buy another asset - another bond just like the one they sold. At that point the banks cash which was not M2 now becomes M2 as the seller received cash and it goes on some banks books as a deposit.


    If the bank buys a treasury directly from the govt then that does nothing to M2 - at least until the govt spends the money at which point that increases M2 as it is deposited in somebody's bank account.


    More to the point though is the shadow bank system that allows these banks to pledge assets at a rate of 1.4 times in the US or as many times as they desire in the UK. The loans from these pledged assets can be used to buy other risk assets and those other risk assets never appear on the banks books at all. Wikipedia does a pretty good job of explaining re-hypothecation for those who care to understand.


    Rothschild said it is not an easily understood process and very few understand it. He was right.
    2 Jan 2014, 11:26 PM Reply Like
  • disraelirex
    , contributor
    Comments (26) | Send Message
    With all due respect, your article is educational for those without a clue, but you were educated as to the benefits of the Fed? IMO, I'd call it indoctrinated.


    You've been led to believe the Fed is working for a group of "elites"?
    You don't say. Most began noticing this during Ronnie RayGun's tenure. Might I suggest Detroit or Camden for your next vaca? They own us all. Welcome to the neo-feudal NWO.


    I find it beyond words that anyone in this racket since 1972 has not questioned how the system worked. I really hate to be the bearer of bad news, but when this thing blows, and it will, you are going to see gnashing of teeth that will make 08 look like a walk in the park during a nice spring rain.


    Please pardon my knee jerk, I posted before I could bear to read the rest.
    2 Jan 2014, 11:28 PM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1740) | Send Message
    Author’s reply » disraelirex


    Just keep in mind most of us who desire to remain relevant and credible don't move easily into the ranks of the conspiracy theorists.


    It is only my understanding of money and banking and economic theory that allows me to consider the Fed's QE policy in a critical way in the first place. I've been highly critical of Fed policy for some time and in particular there wealth effect agenda.


    It is indeed a rather radical idea that the Fed might actually be working to destroy the middle class rather than stimulate economic growth. Most would prefer to believe the Fed is just incompetent and misguided and not just outright evil. I put myself in that camp for the most part but also recognize - and always have - that the structure of the system is highly suspect and lends itself to serious abuse if those who set policy decide to go completely rogue.


    3 Jan 2014, 08:26 AM Reply Like
  • disraelirex
    , contributor
    Comments (26) | Send Message
    Thank your for the reply. The term conspiracy theorist is too often a tool for ridicule, especially by TPTB to manipulate. Look no further than Edward Bernays - Propaganda. It's the playbook. Benoit Mandelbrot was looked upon as a wacko too. IBM snapped him up & we all (should) know the roll they played in WWII.


    May I interest you in four minutes of just what the NSA can do to you? Forward to 56 min in. Conspiracy theory, until it's conspiracy fact.



    You may label me a conspiracy theorist if you choose, and I will label you has willfully ignorant.


    Cog Dis anyone?
    3 Jan 2014, 02:51 PM Reply Like
  • Jonny Tellyarn
    , contributor
    Comments (89) | Send Message
    Wouldn't it be nice to have a banking system that was simple enough to be understood by the common man? I've never been a fan of gold, but at least people understand it, or at least think they do. When people are easily confused, they tolerate all sorts of mischief because they don't even know what questions to ask.
    3 Jan 2014, 11:10 AM Reply Like
  • The_Hammer
    , contributor
    Comments (5052) | Send Message
    why is china buying up massive amounts of gold?
    3 Jan 2014, 11:28 AM Reply Like
  • angkorwat
    , contributor
    Comments (62) | Send Message
    Best. article. ever.


    Being called a conspiracy theorist should be a compliment. It means somebody (usually the state) doesn't like what you have to say (the truth).
    3 Jan 2014, 02:06 PM Reply Like
  • Rigorous
    , contributor
    Comments (375) | Send Message
    I think the Fed has been the most transparent in its history. They did QE to reduce and keep interest rates low. They did QE to reduce and keep the dollar low. They did QE to finance the central government deficit. They did QE to raise stock and real estate prices. They didn’t hide their intentions.


    The effort to keep interest rates and the dollar low have been successful, notwithstanding the recent rise in interest rates. The monetization of the federal deficit has been successful. The effort to raise stock prices has been successful. Real estate price increases have been the least successful. They are up where there are people with high paying jobs and other income and are at extreme levels in SF, the Peninsula, and Silicon Valley. Not so much elsewhere.


    The intention to help the economy in general was through the above methods. They are indirect methods. The general economy is in slow growth mode so the Fed hasn't been successful in achieving the ultimate goal. I believe what many believe about this. The high levels of debt everywhere prevents money supply increases not being offset by decreasing velocity. And I think the more debt that is created at this time will increase the severity of the necessary adjustment of debt levels.


    Government so called “fiscal” policy is slow growth as the masses are convinced the game is rigged and vote in politicians that promote equality rather than growth. After all, growth will mean some people do better than others even as the whole populous does better. The Fed cannot bail this out.


    Go with the flow. Fundamental analysis takes a back seat to technical analysis if you are able to do that. Macro economics is unable to predict anything. Stuber couldn’t be more right about this.


    The only good sign is that for the first time since the early 70’s, real GDP has grown faster than debt. See St. Louis FRED: TCMDO (total credit market debt outstanding) divided by CPI. Then take real GDP and divide it by the result of the first formula. We get a slight up sloping line since the great recession. This means the economy is growing by means of productivity increases instead of debt increases.
    3 Jan 2014, 02:22 PM Reply Like
  • Joseph Stuber
    , contributor
    Comments (1740) | Send Message
    Author’s reply » Rigorous


    GDP is growing only because of debt. Even at $700 billion in debt - if we actually could manage that - it would represent 4% of GDP meaning the only reason we stay positive on GDP is fiscal stimulus driven by deficit spending.


    That is not sustainable growth and the tax burden is taking its toll on consumer spending - again not sustainable. It is just not a model that works and I will say once again those who have benefited from fiscal and monetary policy are big banks and international corporations and the middle class gets to pick up the tab. Not a good deal by any means.


    And don't forget GDP has been re-invented as of the middle of this year and for my money is no longer useful as a gauge of economic health. I am fine with wanting to ride the trend if you think we have further to go but let's not confuse manipulated markets with being a positive for the middle class as it hasn't been and it will only get worse from here.


    3 Jan 2014, 02:50 PM Reply Like
  • The_Hammer
    , contributor
    Comments (5052) | Send Message
    when the next economic downturn comes and they usually occur about every 5 years so we are due the deficit balloons over 1 tril again.
    3 Jan 2014, 07:50 PM Reply Like
  • Rigorous
    , contributor
    Comments (375) | Send Message
    On reflection, my looking at TCMDO is misleading. The central government debt is up while the private sector isn’t. Without the central government debt funded by Fed created money>PDs>US Treasury>spent into the economy, there wouldn’t be any growth at all.
    4 Jan 2014, 03:05 PM Reply Like
  • pdtor
    , contributor
    Comments (1528) | Send Message
    Joseph, great article. I recommend to anyone who is interested in the FED to read " The Creature from Jeckyll Island". that goes into the history of central banks in the USA. I am not a conspiracy guy, but the book makes many irrefutable points. I hesitate to discuss this topic, since at the last financial form where this was discussed it brought out the extremists, and somebody brought out "The Elders of Zion". Does not mean that there is not a self serving cabal between members of the elites and central bankers.


    PS I think you may have kicked over a hornets nest.


    Good work and a happy new year
    6 Jan 2014, 03:08 PM Reply Like
  • Ted Waller
    , contributor
    Comments (1291) | Send Message
    I too have been flummoxed by the behavior of markets over the past year, and such a thing should make a person re-examine his or her beliefs. But I'm sorry that you have gone off into the conspiracy realm because it's incompatible with the kind of analysis you have done so well in the past. There are other explanations for the economic environment we are now in.
    9 Jan 2014, 06:22 PM Reply Like
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