FED + Global Too Big To Fail Banks + QE I & II = Global Ponzi Scheme + Inflation + Toilet Paper Money. QED -
By Matthias Chang
Sunday, 12 December 2010
http://futurefastforward.com/malaysia-updates/4663-by-matthias-chang
The US Government under Bush and now Obama has morphed into a fraudulent enterprise. QE I has now been exposed as the biggest fraudulent transfer of wealth by the Federal Reserve to the global banking elites. Will the global banksters get away with it or will the American people wise up and make them pay for their crimes?
On 5th December 2010, appearing on CBS’s 60 Minutes, Bernanke spun a financial yarn that betrays the depth of his intellectual bankruptcy and dishonesty.
This is what he said,
“One myth that’s out there – is that what we are doing is printing money. We are not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way”.
This statement has created some confusion among economists and financial pundits. But, I am not surprised. There are also the paid scribes who echo whatever is churned out by their financial paymasters. A well known author (Ms X) [1] shares Bernanke’s view that Quantitative Easing (QE) is not inflationary and is not “money printing”.
We need not refute each and every ground which Ms X and Bernanke rely in support of their misplaced confidence that “printing money” (digital book entries or otherwise) by the Fed will solve all the problems faced by the U. S. of A.
The central issue in this debate is whether a country can, by issuing more debts to repay previous debts, get out of the debt spiral. It is not whether a government should issue its own currency. [2]
With regard to the US, foreign creditors are the principal buyers of US treasury bonds and have become the largest creditors. The US has a massive deficit and will continue to have massive deficits at the minimum till 2020 [3]. A debt incurred must be repaid.
Following QE I and QE II, foreign creditors have been very cautious and have slowed down their purchase of US treasury bonds. The Fed has stepped in and taken up the slack. The Fed will soon eclipse China as the largest holder of US treasuries!
Hence the debate – what will be the consequences of this Fed Policy? The author, Ms X in a recent article asserts,
“The US does not have to rely on foreign investors even to buy its bonds. If the investors are not interested, the central bank can buy the bonds. This is, in fact what the Fed’s second round of quantitative easing is all about: issuing $600 billion for the purchase of long term government bonds”.
She went on to assert that,
“If the Fed were to follow the lead of Japan and hold federal debt equal to the country’s gross domestic product, the Fed would be holding $14.75 trillion in federal securities, enough to refinance the entire US Federal debt of $13.8 trillion virtually interest free.”
In essence, what Ms X is saying is that the Fed can literally “print” $14 trillion to pay off all US existing debts and be its sole creditor with no negative consequences to the economy or to the US dollar. The rationale behind this contention is,
“The US does not owe debts in a foreign currency over which it has no control. It can issue bonds payable in its own currency”. [4]
If only it was so simple. How do we expose this fallacy? Simple!
If the Fed can wipe out the debt by the mere printing of money, why bother with incremental “printing” of digital toilet papers – QE I and QE II?
Bernanke has already indicated that more QE will be forthcoming if QE II does not have the desired effect -
“It’s certainly possible. It depends on the efficacy of the program. It depends on inflation. And finally it depends on how the economy looks.”
Why has the Fed not declare once and for all, here and now, to the entire world that it is going to purchase $14 trillion worth of treasury bonds and hold them at its absolute discretion (dispensing with the need for fixed maturities i.e. 10 years, 30 years etc.) so that the US government can repay all its debts immediately and thereby saving hundreds of $billions in annual interest payments?
Why the façade of “printing money” incrementally by way of QE I, QE II and maybe QE III, QE IV etc.?
This approach contradicts one of the pillars of Ms X’s argument that since debt to the FED will not carry interest, the US government should borrow from the Fed instead and not from the foreign or other domestic creditors. If the justification is to avoid interest payments to creditors (especially foreign creditors), it follows that the sooner these growing debts are paid, there would be less interests to be paid by American taxpayers.
By way of an illustration: Assuming Ms X borrowed $10 million with interest at 5% per annum some years ago as a result of her greed and foolishly “invested” the whole lot in toxic waste products peddled by Goldman Sachs, Merrill Lynch, JP Morgan etc. As a result of the financial crisis, her so-called “investments” imploded and she is now holding a bunch of toilet papers (junk bonds or whatever) and has no means to repay the growing debt. A Good Samaritan comes along and smitten by her charm, offers to bail her out of the entire debt – the principal $10 million and all the accumulated interests immediately and that she can take her time to repay this very, very friendly loan with no interest charges and allegedly with no strings attached.
What would be your reaction as a bystander, if she responded to the Good Samaritan’s offer by asking the Good Samaritan to pay off her existing debts by a number of fixed installments over a period of years? Your reaction would most likely be,
Is she stupid or what?
What is her angle? Why would she want to pay more interests to the bank, when she could be debt free immediately and her recourse is to repay Sugar Daddy when she is able and willing and with no interest charges?
If Ms X truly believes in her warped thesis, she should be advocating that the Fed (having all the power and ability, with the connivance of the US Treasury) create the $14 trillion out of thin air and pay off the entire national debt, so that the US economy can jump start immediately and prosperity restored.
Ms X readily admits that,
Today that currency is issued by the Federal Reserve, which is privately owned by a consortium of banks…
But, prior to QE I and QE II, the Fed did not have in its books and or in its vaults $14 trillion! Prior to the financial crisis in 2007, the value of assets in its balance sheet was approximately $800 billion.
But, Ms X and Bernanke insist that there is no increase in the “money supply” and that no money was “created out of thin air”.
Last week, the Fed released documents on emergency measures it took between 2007 and 2010 to bail out major banks in the US and around the world, as a result of the Dodd-Frank Wall Street Reform Act.
Arising from more than 21,000 individual transactions, the Fed secretly doled out a staggering $12.3 trillion - $3.3 trillion in liquidity and $9 trillion in “other financial arrangements” (whatever that means). [5]
If QE I did not work, notwithstanding the massive flood of “digital money” in the trillions, why is there a need for QE II and as admitted by Bernanke, maybe more QE in the future? And why the secrecy?
Why bail out the Too Big To Fail Banks first and not the national debt?
If, as asserted by Ms X that the Fed can resolve legally by the wave of Bernanke’s financial magic wand to conjure $trillions, why did the Fed refuse to have its accounts audited until forced to do so?
This very fact demolishes Ms X’s simplistic argument that the Fed can just create $14 trillion out of thin air and refinance the entire US national debt by becoming its sole creditor!
To bury Ms X’s intellectual dishonesty for good, we need to ask a simple question. Can the Fed create money out of thin air in excess of the GDP?
The GDP of the US in 2009 is estimated to be $14.2 trillion. [6] For the Joe Six-Packs, this means that the total value of goods and services produced by the entire country is $14.2 trillion. It is through taxes and other levies that the federal government pays for its expenses and debts. If a family has no income, it will not be able to pay for its expenses and will have to borrow to survive.
The US government has been in deficit for years and has been borrowing to survive.
Even if the US government wants to “print” $14 trillion to pay off its debts immediately, it cannot be done because no country will accept dollars in payment for their exports, as it would be obvious to one and all that the dollars so created has no correlation with the economy (GDP).
We have to understand that even in a $14 trillion economy, the amount of currency in circulation (notes and coins in your wallet) is only about $800 billion. However, most payments for goods and services are effected through the banking system, principally by cheques (checks) and other means. [7]
This is why QE I was clouded in so much secrecy. And the global fraudsters almost got away with this scam because, other global banks and central banks which have high exposure to dollar liabilities conspired with the Fed and were themselves the beneficiaries of this scam. [8]
The issue is not whether a government can issue its own currency. Of course it can. All governments do that. Even under the Classical Gold Standard. In the gold standard system, the currency (the notes in your wallet) was backed by gold and was issued by the government. The currency’s value is backed by gold.
This is why a fiat currency has no intrinsic value - zero.
The US dollar became a fiat currency in 1971 when Nixon disallowed the redemption dollars for gold. For the first time in American history, the dollar was totally fiat!
Thus far, the US got away with the fiat money scam because it was able (by virtue of its military might) to impose its will and demanded that global trade be denominated in dollars. From that day onwards, whenever the US needed money, it just “printed” them (digitally or otherwise). But, it has now reached a stage where the dollar is considered “toilet paper money”. Even as late as the 1990s, no economist and or financial pundits would dare refer to the dollar as toilet paper. But today, it is accepted as fact. The dollar’s survival is now dependent on China and to a lesser degree on the Euro.
We will now address another fallacy promoted by Bernanke and Ms X – that QE I and QE II are not inflationary. Ms X arrogantly mocks and taunts her critics when she wrote,
“Back in October, the economic buzzword had become “money printing” and “debt monetisation” … The Fed was initiating their policy of QE II and you’d have been hard pressed to find someone in this country (and around the world for that matter) who wasn’t entirely convinced that the USA was about to send the dollar into some sort of death spiral. QE II was about to set off a round of inflation that would make Zimbabwe look like a cakewalk. And then something odd happened – the dollar rallied as QE II set sail and hasn’t looked back since”.
The last two sentences betray Ms X’s intellectual dishonesty. The reference to Zimbabwe is a red herring and totally irrelevant and she knows it. It is also clear that Ms X is deliberately confusing price inflation with monetary inflation, the former being the consequence of the latter. Monetary inflation is the increase in supply of “money”. Ms X’s contention can be easily refuted.
Let’s get down to basics.
1. Markets (stocks, currencies and commodities) are rigged, manipulated in favour of those who control the money supply. It is meaningless for Ms X to assert that “the dollar rallied as QE II set sail and hasn’t looked back”. On a previous occasion when ship owners displayed similar arrogance that their ship (the Titanic) was indestructible, it sank after colliding with an iceberg on its maiden voyage!
2. Ms X was dishonest and even devious when she failed to contextualize the alleged dollar’s rally – whether it was against other toilet paper fiat currency, commodities and or precious metals – gold and silver. In so far as commodities and precious metals, it is utter nonsense to talk about a dollar rally. Prices for commodities, such as copper, cotton, rubber, gold and silver have shot up beyond all expectations. And contrary to Bernanke’s assertion that QE will lower long term bond yields, Treasury’s 30-year bond has jumped 1% to 4.5% and 10-year notes has steepened to 3.25, an increase of 75 basis points. The dollar’s purchasing power has depreciated. This is the result of monetary inflation.
3. And any temporary strengthening of the dollar was the result of the massive propaganda and over exaggeration that the so-called debt crisis of Portugal, Ireland, Italy, Greece and Spain (PIIGS) would destroy the Euro, thereby causing a short term flight from Euro by some idiotic fund managers to the so-called “safety” of dollar and dollar assets. This is also caused by the market manipulation by the Fed. But overall, and notwithstanding this short term rally (if it can be called as such) the dollar’s purchasing power has been declining since 1971!
4. The Fed’s Combined Financial Statement for 2009 shows that it has $11,037 million of Gold Certificates. Payment for the gold certificates by the 12 Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold of the Treasury. The Treasury may re-acquire the gold certificates at any time and the Reserve Banks must deliver them to the Treasury. At such time, the Treasury's account is charged, and the Reserve Banks' gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy ounce. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on the average Federal Reserve notes outstanding in each Reserve Bank. [9]
As at 9th December 2010 the price for Gold Bullion is $1,385 per oz and $1,427 per oz for Gold Maple Leaf. [10]
Therefore, Ms X, please tell us where is the dollar rally? The dollar purchasing power has plummeted! Stop playing Alice in Wonderland!
5. A fundamental principle regarding fiat money (toilet paper money) which Ms X fails and or refuses to acknowledge is that it is inherently inflationary. It is in simple terms, unsound money. And as observed by Voltaire,
Paper money eventually returns to its intrinsic value – zero!
Under QE I, the Fed doled out a staggering $12.3 trillion - $3.3 trillion in liquidity and $9 trillion in “other financial arrangements” (whatever that means). Out of the $3.3 trillion, a third went to bail out the British Banks ($1.5 trillion). Barclays got a whopping $863 billion, Royal Bank of Scotland received $446 billion, Bank of Scotland $181 billion, Abbey National $19 billion and HSBC, $10 billion. This is monetary inflation!
6. Fiat money is also the most convenient way to finance wars. The bulk of the US Federal debts are to finance the wars in Iraq and Afghanistan and to maintain the humongous Zionist Anglo-American Military-Industrial Complex. Hence, one of the hidden agenda of QE is to finance the US Empire’s military adventures. Nobel Laureate, Joseph Stiglitz has estimated that the Iraq war alone would costs $2-3 trillion and mounting. It would be naïve to expect Bernanke to confess to this state of affairs. The war in Afghanistan has dragged on for 9 years with no end in sight.
7. Ron Paul has warned that as of November 2010, total US public debt has reached an astonishing $13.7 trillion. This means that although Congress just raised the debt ceiling to $14.3 trillion in February 2010, the new Congress will face another debt ceiling vote in the next few months! Ron Paul observed,
“Surely, we are facing an emergency debt spiral, as evidenced by the Federal Reserve’s recent commitment to buy another round of treasury debt. It is now quite obvious that the US government plans to inflate its way out of debt, and the world is fleeing our dollar in response. Just seven years ago Congress raised the debt ceiling to $6.4 trillion which means the federal government had doubled its indebtedness in less than a decade. Annual deficits for 2011 and beyond are projected to be at least $1 trillion. So it is no exaggeration to state that federal debt is growing exponentially.”
Before proceeding to refute Ms X’s other incredulous assertions, it would serve us well to go down memory lane, as it was not the case that the global economy has always been flushed with fiat money.
But, we need not travel too far. There was, not too long ago, a period known as the “Golden Age” [11] whereby the Classical Gold Standard prevailed. The currency of each country was defined in relation to a certain weight of gold. The dollar was defined as 1/20 of a gold ounce. Therefore, the exchange rates of various currencies were fixed in relation to gold. It has been said that while the Classical Gold Standard was not perfect, it provided the best monetary order which kept business cycles getting out of hand. [12]
The Classical Gold Standard was destroyed by the warmongers.
To finance World War I, the printing press worked overtime to produce toilet paper money. There was just not enough gold to back these papers, so the governments who were embroiled in the war, went off the Gold Standard.
There were several attempts to remedy the problem, but they all failed miserably [13]. Post-World War II, bogged down by the Korean War and thereafter the Vietnam War, the US indulged in massive monetary inflation. Europe and Japan became restless as they were piling up dollars which were overvalued. I shall quote from Murray Rothbard regarding the crisis that evolved at the material time [14]:
“As the purchasing power and hence the value of the dollar fell, they became increasingly unwanted by foreign governments. But they were locked into a system that was more and more of a nightmare. The American reaction to the European complaints, headed by France and DeGaulle’s major monetary adviser, the classical gold-standard economist Jacque Rueff, was merely scorn and brusque dismissal. American politicians and economist simply declared that Europe was forced to use the dollar as its currency, that it could do nothing about its growing problems, and therefore the United States could keep blithely inflating while pursuing a policy of “benign neglect” towards the international monetary consequences of its own action.”
And as they say, the rest is history. The dollar since that time began its downward trajectory to its present status as toilet paper money!
Today we see the same arrogance. When China complained that the US is exporting inflation to emerging countries and distorting currency values, Bernanke retorted [15]:
“Keeping Chinese currency too low is bad for the American economy, because it hurts our trade. It is bad for other emerging market economies. If they fix their currency to the dollar, then they have to have the same monetary policy, essentially, that the United States has. China is growing very quickly. They are risking inflation by importing US monetary policy. That’s a problem for them.”
This is the perverse logic of Bernanke. He wants to have cheap imports from China (which by all measures has helped the US maintain low price inflation across a wide range of consumer products), to have China to continue to lend the US money to finance its wars but it is not willing to resolve her structural problems – an out of control debt-based economy and a moribund banking system.
Gary Dorsch of Global Money Trends has rightly pointed out that Bernanke’s QE Ponzi scheme has backfired.
There is no better indictment of Bernanke’s reckless monetary policies and Ms X’s intellectual dishonesty than to quote from their own mentor, Alan Greenspan:
“What we see is politicians cutting taxes with borrowed money, and spending on new programs, new projects with borrowed money. But the debt is increasing at a rate of over a trillion dollars a year. And because interest rates are low, being in a weak economy, it is very easy for the government to sell as many bonds as it wants. I think there’s complacency rising at this stage. Interest rates are down for a number of technical reasons. But assuredly they’re not going to stay here… We don’t know at this stage why or how the markets respond to this sort of – this type of massive budget deficit. And I think we’re taking a very high risk. This is not a trade off between good and bad. In fact, I sometimes put it between terrible and catastrophic.”
If Bernanke and the Maestro cannot even see eye to eye and they are the best of the best of the global financial elites, we better run for cover and prepare for the worst.
Protect your wealth, turn to Gold and Silver.
End Notes
[1] I will not mention her name, as I have do not want this debate to degenerate into a slugfest between personalities. However, there have been postings in the internet where various authors have identified the said author when refuting her thesis.
[2] This issue will be addressed later. All governments issue their own currency except members of EU (as they have a common currency via the ECB) and the US, where the Fed issues its own “Federal Reserve Notes”. The UK, in spite of being a member of the EU, issues its own currency via Bank of England.
[3] It may not even survive beyond 2015 in its present state, so I am a bit generous here.
[4] But the US is not the only country that can issue bonds payable in its own currency.
[5] David DeCraw, The Wall Street Pentagon Papers.
[6] CIA Factbook.
[7] The US is essentially a debt based economy. The fractional reserve system of banking also allows the banks to create money out of thin air via loans. This has also increased the “money” supply.
[8] Central Bank Liquidity Swaps: Because of the global nature of bank funding markets, the Federal Reserve has at times coordinated with other central banks to provide liquidity. During the financial crisis, the Federal Reserve entered into agreements to establish temporary reciprocal currency arrangements (central bank liquidity swap lines) with a number of foreign central banks. Two types of temporary swap lines were established: dollar liquidity lines and foreign-currency liquidity lines. These temporary arrangements expired on February 1, 2010. In May 2010, temporary dollar liquidity swap lines were re-established with some central banks, in response to the re-emergence of strains in short-term U.S. dollar funding markets. The Federal Reserve operates these swap lines under the authority of section 14 of the Federal Reserve Act and in compliance with authorizations, policies, and procedures established by the Federal Open Market Committee (FOMC).
Dollar Liquidity Swap Lines: In December 2007, the FOMC announced that it had authorized dollar liquidity swap lines with the European Central Bank and the Swiss National Bank to provide liquidity in U.S. dollars to overseas markets, and subsequently authorized dollar liquidity swap lines with additional central banks.
The FOMC authorized the arrangements between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank. Those arrangements terminated on February 1, 2010. In May 2010, the FOMC announced that it had authorized dollar liquidity swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate.
The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve.
Dollar liquidity swaps have maturities ranging from overnight to three months. When the foreign central bank loans the dollars it obtains by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the foreign central bank's account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions. The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement, and the Federal Reserve is not a counterparty to the loan extended by the foreign central bank. The foreign central bank bears the credit risk associated with the loans it makes to institutions in its jurisdiction.
The foreign currency that the Federal Reserve acquires is an asset on the Federal Reserve's balance sheet. Because the swap is unwound at the same exchange rate that is used in the initial draw, the dollar value of the asset is not affected by changes in the market exchange rate. The dollar funds deposited in the accounts that foreign central banks maintains at the Federal Reserve Bank of New York are a Federal Reserve liability.
Foreign-Currency Liquidity Swap Lines: In April 2009, the FOMC announced foreign-currency liquidity swap lines with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. These lines, which mirrored the dollar liquidity swap lines, were designed to provide the Federal Reserve with the capacity to offer liquidity to U.S. institutions in foreign currency. The foreign-currency swap lines could have supported operations by the Federal Reserve to address financial strains by providing liquidity to U.S. institutions in sterling in amounts of up to £30 billion, in euro in amounts of up to €80 billion, in yen in amounts of up to ¥10 trillion, and in Swiss francs in amounts of up to CHF 40 billion. The FOMC authorized these liquidity swap lines with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank through February 1, 2010. The Federal Reserve did not draw on these swap lines.
[9] Source: http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2009.pdf
[10] Source: www.monex.com
[11] From the early 19th century to early 20th century.
[12] Murray Rothbard, What Has Government Done to Our Money?
[13] The Gold Exchange Standard 1926-1931, Fluctuating Fiat Currencies, 1931-1945 and finally Bretton Woods and the New Gold Exchange Standard, 1945-1968.
[14] Murray Rothbard, What Has Government Done To Our Money, p109
[15] Interview with CBS’ 60 Minutes on 5th December 2010
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