GOLD ECONOMY

DON'T SHOW ME THE MONEY

by Leonard Rivero

So much cash is being printed by the Fed that it devalues the dollar in the World Market.

    Just check the chart on the Federal Reserve Bank of St. Louis’ website and see what’s happening to the dollar in the US economy.  Normally the monetary base grows at about the same rate as total spending.  Between Nov. ‘07 and Aug. ’08 it increased from about $850 billion to about $875 billion.  Then between the middle of Sept and the end of last year as the Fed printed paper money following the bankruptcy of Lehman Bros. it shot up by $1.35 trillion.

Since then, the acceleration has increased month by month and between Oct 8th and Dec 31st, the annualized rate of increase was 922 percent.  History has shown that when a central bank persists in creating money at triple-digit rates, inflation will skyrocket and that paper money will lose much of its value.  In 1920’s Germany, people had to carry their cash in wheelbarrows to the store to buy groceries.  More recently, Zimbabwe 2008 inflation rate was 89,700,000,000,000,000,000,000 percent where prices were doubling every five days.

The present process in the US is as follows.  The Federal Reserve is NOT a government agency.  It is a private company controlled by powerful people.  Congress grants them the right to print paper money.  It does this simply by leasing GOLD which it may or may not have to the Bullion Banks which is owned by the Fed Reserve at 1% interest.  The Fed then prints the paper money and lends it to major banks at a higher rate which is how they make their money.  The major banks then lend the money to the big corporations which are also controlled by these same powerful people.  Smaller companies don’t qualify for these loans and the 11,000,000 families that lost their homes through bankruptcies and foreclosures don’t qualify either.

I predict that the US will never get back to the way it was before the unions became so powerful.  As they forced companies to increase payrolls, benefits and pension plans, these companies lost their competitive edge in the world market.  In order for the executives to survive, they had to source their parts off-shore which later led to partial and then total assembly in order to be competitive.  This has not just happened recently but has been ongoing for decades until several years ago when the big automakers decided to use the billion dollars in their pension fund to finance factories outside of the US.  These factories have been most profitable simply because all the parts and labor cost a fraction of their US facilities and their big target market was mostly overseas.  At this point, the best thing that can happen to them now is to go bankrupt in the US so that they don’t have to pay back the billions in the pension fund they used.  If the US government and the taxpayers do not bail them out, then they can blame the government for not rescuing them.  Their overseas operation will continue to provide huge profits but no one can or will force them to use that money to make restitution in the US

I believe that the $800 billion bail out was a farce.  It only helped the large corporations that mismanaged their portfolios to protect some big investors who held stock in these companies, and who were the same investors that contributed to the elections of key Congressmen.  None of this bail out money went to help the millions of families that lost their homes and businesses because now that their credit rating is bad, they can’t qualify for any new loan.  Those millions of families can only rent and therefore the rental market is currently in high demand.  Obviously, when these families had good paying jobs, they were able to qualify for a high mortgage in a high end market.  Homes that were selling for $50,000 to $100,000 10 years ago were selling for $600,000 to $800,000.

When hundreds of thousands of educated and experienced people were losing their jobs and couldn’t find other similar paying jobs they experience difficulty with keeping their mortgage current.  As soon as they fell behind, their credit rating dropped and in desperation, they all tried to sell their homes and prices dropped until they realized that they owed more than the market value of their home.  Desperate with mounting difficulty keeping up with the mortgage, taxes and rising prices, many decided to stop paying and waited until they were foreclosed, ruining their credit for future qualification of a new mortgage. 

At some point, the mortgage bankers must have realized that foreclosing on homes that was worth less than the mortgage value was a big problem, so they bundled up these pieces of paper and got some worthless agency to certify them Triple-A rated in order to sell them to the big financial institutions including many OVERSEAS INVESTORS.  Instead of the government bailing out these crooks, they along with the rating agencies should be prosecuted.

So far, the Fed has pulled off a very delicate trick.  Under normal circumstances, the cash it has printed and poured into the major banks would be inflationary.  But with so much of the money being horded, that hasn’t happened.  In fact, the risk is that the economy will starve from the lack of spending causing deflation.  The Fed’s challenge is to know where to respond, closing the spigots as soon as spending finally opens back up.

Bernanke is making up for some past mistakes.  With unemployment soaring and output falling, deflation will most likely be a bigger threat to the economy than inflation.  However, other countries will view this as a devaluation of the US dollar and Canada’s dollar will closely follow. 

Based on what happened to Japan in the 1990’s and this country in the 1930’s, we know that this scenario yields economic stagnation that lasts for years.  When the Fed announced last December that it would implement exceptionally low interest rates, that only helps the large corporations that don’t need the money but it doesn’t help the small business owners because they can’t qualify for these low interest loans.

Big banks maintain big bank accounts, but their monies are deposited at the Fed.  Deposits in these accounts are known as reserves, and banks use them to settle transactions with one another.  Rather than sending cash, one big bank instructs the Fed to debit its account and credit the other bank’s account.  In seeking to keep credit flowing, the Fed has greatly expanded its lending programs, allowing banks and other financial institutions to exchange more illiquid assets, such as mortgage securities, for dollars.  Before the onset of the subprime crisis, the Fed demanded ultra safe securities such as Treasuries as collateral when it extended loans to banks.  Today, it has greatly broadened the range of collateral it accepts.  The result has been a massive increase in bank reserves. At the end of August ’08, they totaled about $100 billion: by the end of December, they had grown to more than $820 billion.  On Jan 5, ‘09 the Fed it launched a program to buy up to $500 billion in mortgage backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, with the aim of encouraging those institutions to make home loans again.  It has committed another $200 Billion to supporting the purchases of securities backed by student, auto, and credit-card loans, along with loans guaranteed by the SBA.  The Fed said it intended to finance both of these initiatives by creating more new reserves.  The reason is clearly the Fed and the taxpayers, who provide the central bank’s capital, have been taking on additional credit risk by trading “cash for trash”.  When the Fed credits a bank with new reserves, it can leave the money at the Fed earning a modest rate of interest or it can ask the Fed to send the cash over and use the money to make new loans.  However, why make new risky loans when they can simply collect interest without any risk.  Therefore, the small business owner and the unemployed families have little or no chance in recovering from their present economic situation.

There is no evidence that banks are extending more credit.  Just ask anybody who has recently applied for a loan will testify that bank money is harder to get.  In fact, since Oct the total amount of bank loans have been falling due to the deteriorating economy, banks would rather risk making new loans that may not be repaid rather than keep a high level of reserves at the Fed and pocket the interest.

 

Some of the facts and figures were sourced from www.portfolio.com and from an article by John Cassidy on Economics.