WE’RE BEING ROBBED BLIND – AGAIN, YET, STILL

Caleb S. Atwood

The Federal Reserve recently announced that it will purchase $300 billion in Treasuries by the end of October, 2009. Recently 10 year bonds have been paying 3.65% interest. At that rate, the Fed will “earn” $10,950,000,000 ($10.95 billion) interest per year on these securities. That’s a pretty huge number to get a grip on it so let’s look at it in simpler terms.

We’ll be paying the Fed $600,000 interest per day on the $300 billion the Fed will create out of thin air!

This is in addition to interest on $1,372,692B in U.S. securities already purchased by the Fed1. Estimating interest on these at the same 3.65% rate, we’re paying the Fed $50,103,258,000 interest every year on these securities. Again, in simpler terms we’re already paying the Fed $137,269,200 every day on money it has created out of thin air!

We’re also paying interest on billions worth of U.S. securities purchased by other governments, including $2,032,395,000,000 the Fed holds in “custody for foreign official and international accounts.” If the average interest on these securities is calculated at 3.65%, we’re paying $74,182,417,500 interest each year on them. To simplify once again we’re paying these foreign governments $203,239,500 interest every day on securities most of them purchased with money they too created out of thin air.

Combined,we’re paying $341,108,700 interest per day on these securities.

As staggering as these amounts are they do not include interest on securities the Fed does not hold for foreign governments or interest we’re paying banks, pension plans, mutual funds or other investors.

Eventually, we’ll have to redeem all these debt based securities with dollars we cannot create out of thin air.

Caleb S. Atwood

1. Source: “Factors affecting Reserve Balances” in the August 13, 2009 Federal Reserve Statistical Release.

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by Howard S. Katz

8-10-09

To guide good speculators, I publish a newsletter, the One-handed Economist.  You can subscribe ($300) at my website, www.thegoldspeculator.com 

You can also visit (no cost) my blog site, www.thegoldspeculator.blogspot.com.  This week’s blog is about how the Pilgrims abolished communism and switched to private property and celebrated their success with the holiday of Thanksgiving (which ought to be celebrated Aug. 8 instead of in November).

On Monday, Aug. 3, 2009, the U.S. dollar index broke down to 77½, thus completing a double top (Nov. ’08 and March ’09). This was the major economic event of 2009 and predicts a further decline in the index to 68, which will be an all-time low. As is well known, the precious metals and most commodities are international goods. A decline in the dollar of 13% against other currencies will translate into a rise in the dollar price of gold by 15% (versus those currencies). But since all the other currencies of the world are paper currencies and are similarly declining against goods, the actual rise in gold will be much greater. Indeed, the events of 2009 are merely the tipping point in a process which began in 1981 with the Regan tax cut bill.

In 1981, Ronald Reagan sharply cut taxes. His intent was not to reduce the size of the Government. Indeed, Government spending under Reagan as a percent of GDP reached its highest level for the last half of the 20th century (23.5% in 1983). When David Stockman (Reagan’s Director of the Office of Management and the Budget) demanded a cut in spending to match the cut in taxes, Reagan over-ruled him. Over Reagan’s 8 years as President the nation’s money supply almost doubled, and this rate of printing money continued through the Bush (Sr.) Administration.

This enormous creation of money did not seem to have its normal effect on the Consumer Price Index. For example, in 1986 the U.S. money supply increased by 16.9%. Two years later, in 1988, the Consumer Price Index rose by only 4.4%. In 1992, the U.S. money supply increased by 14.3%. Two years later, in 1994, the Consumer Price Index rose by only 2.7%. This was an apparent violation of the Friedman-Schwartz principle that after an increase in money, prices would rise 2 years later by 3-4% less. Where did this money go, and what happened to the increase in prices which was expected from it?

Part of this answer is that (in Jan. 1983) the Government changed the method of measuring the Consumer Price Index by removing housing prices. Housing prices constituted 30% of the CPI. So when housing advanced by 70% from 1997-2007, this would have fed a 21% additional advance into the CPI. Instead of computing housing prices, the Government substituted rents, but over this same period rends hardly moved at all. Indeed, when the New York Times advocated this substitution in Jan. 1983, it openly admitted that the purpose was to cause the CPI to advance less rapidly and in this way deceive the American people about the real price level.

However, I do not believe that Government lying about the economic statistics is the main reason for the above discrepancy. There is a larger phenomenon which I call the commodity pendulum.

The steady rise in prices in this country began in 1963 with the Kennedy tax cut of that year. This caused the Government to run a deficit, and the deficit was financed by the creation of money. As the deficits got bigger, the money printed got bigger.

But as money was printed over the course of the 1960s and consumer prices rose, we note an interesting phenomenon. Commodity prices remained flat with the CRB index fairly steady at 100.

Adam Smith says that, when the demand for goods goes up (and money is the demand for goods), then the price will have to follow. But Adam Smith does not say anything about how long this process will take. He merely notes that in the long run this will be the result.

It was the job of Smith, the theoretical economist, to establish universal truths, which work all the time. However, it is the job of us, the practical economists, to established rules of thumb to help apply Smith’s principles to practical situations. And what we practical economists observed was that commodity prices did rise after the Kennedy tax cut of 1963, but they took an unusually long time to do it. By late 1971, the CRB index was still at 100. read more

Lost Control & Economic Mythology

by Jim Willie CB August 6, 2009

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Jim Willie CB, editor of the “HAT TRICK LETTER”

Jim Willie does seem to have a unique perspective on our National Financial Situation and I believe he is very close to the center of the truth.

A great question to ask is: what was the first important chapter written in nonsensical Economic Mythology? It gave powerful intellectual protection and coverage by economists, and resulted in widespread acceptance. The answer is clearly the break in the Bretton Woods Accord, when in 1971 Nixon broke the gold standard and permitted the USDollar to float on a cloud of arrogance and on a wave of liquidity that is best described as debt mixed with counterfeit. Little known then, but better known now, is the role of the USMilitary in propping up the value and acceptance of the USDollar. The nation and world were told that greater flexibility would result in order to build economies, deal with cyclical problems, and contend with the needs of global population growth. The momentum of destruction is powerful, damage accelerating, and platforms disintegrating. The key to mythology is to recognize it as nonsense spouted by the high priest economists whose handiwork of destruction must be hidden from view, only to see yet another chapter unfold that captures the attention of the innocent and ignorant. The priesthood is left in charge of the intellectual dogma behind mythology, not much different from communist mumbo jumbo about power to the proletariat, complete with a supporting cast of a Politburo. The US Politburo is hidden from view, a pack of misfit incompetents and established failed figures continuing to spout policy and to manage Fannie Mae, AIG, and now General Motors. The US Federal Reserve is the keeper of the Holy Grail, now manifested in criminal confiscation and disbursement of USCongressional funds, and a secretive balance sheet. Watch them defy the US Supreme Court. Their dogma is mostly vapor with little substance, sufficient to keep the population in participation or at bay, but at least confused.

THE USDOLLAR CRISIS IN FIRST STAGE
The latest nationally advertised but unrecognized mythology is very convenient, since a USDollar crisis has begun. Political and intellectual cover is needed. The USEconomy would benefit from a lower USDollar, due to a quantum jump in export trade. A lower US$ exchange rate would indeed benefit the USEconomy in general, and US corporations in particular, provided the nation had not shipped a significant portion of its industrial base overseas. This aint the 1970 decade. It did so to capture the low cost of foreign labor, without thought given to the lost capital, lost wages, growing debt, and lost sovereignty from foreign creditor dominance. The US pursued financial dominance, and finally failed as Mother Nature wielded the backside of the Inflation Sword. The Chinese now dictate many key policies. They probably ordered President Obama not to renew Bernanke as USFed Chairman. After his appearance three years ago, lecturing the Chinese elite in Beijing, he was told never to return, EVER, deemed persona non-grata. Lost sovereignty has no good side!

The Chinese are the spearhead behind pushing the USDollar off the primal global throne. A lower USDollar will not accomplish much on export trade, given the lost critical mass of export businesses. A lower US$ will, however, spawn a currency crisis, a bank crisis, enough to take the global revolt against the US$ to new levels among creditor nations. The lower US$ will also force a quantum leap in the entire cost structure for the USEconomy, a factor ignored almost totally. The crude oil price has been giving a solid clue on this effect, but it is largely ignored. Somehow, goofy USGovt policy to limit crude oil contract positions is a quick fix ordered by Goldman Sachs. It will not work. In fact, good old Goldman Sachs changed their Euro recommended long position immediately before the Chinese delegation met in the White House last week. The quick rise in the USDollar was met by a fierce decline at the end of the week, as the Chinese were major sellers. GSax gave them a better price.

The powerful reversal pattern evident since last October has finally begun to break down. It is in the stage #1, confirmed by numerous sources who note growing panic, growing dismantlement of support pillars, and growing expectation of a major currency event. The cyclicals are all negative and weak. The crossover of the 20-week moving average below the more stable 50-week MA is a strong bearish signal. The momentous pile-on is to follow. The breakdown in progress is sufficient to take the gold price over the elusive 1000 level once and for all. Some veteran sources report that the gold price breakout move might be extraordinarily powerful, far stronger than even the gold community expects. The Chinese are defending the gold price, if truth be told. They have resources, in the form of over $2000 billion in savings (a war chest). They have motive, in the form of wanting to install the Yuan as a global reserve currency. And they are very angry, in particular at bank bond fraud, but also at debt monetization. They abhor a widely understood USGovt policy of trying to inflate the debts away at foreign creditor expense. This is seen as betrayal. Decisions among creditors have been made, and a path has begun to deal with the problem. read more