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February 21, 2005

Four Fed Hikes and a Funeral
by Rob Kirby

This essay originally appeared at Financial Sense.

Sounds like a play on words - or does it? Ok, there is a hidden meaning - actually, it's a tribute of sorts. I'd be perfectly happy to call it cryptic cacophony and leave it at that. Others might prefer the definition of double entendre or in Greenspan parlance, coded Fed Speak. The four Fed hikes I speak of is actually [surprise!] a misnomer - we've already had six. But heck, it sounded nice, and hey, why bother being forthright when you can keep 'em all guessing? What's a few Fed hikes among friends, ehh?

So who, or perhaps better stated - what - do you all supposed died, anyway? Any guesses? Anyone want to cast a vote for chivalry? While you would not be completely inaccurate if this was indeed one of your guesses, gallantry, graciousness and good manners were, by most accounts, casualties of the last century. But so too was John F. Kennedy and this essay is not about him either. I'm sure most of you are aware of the age old adage in the investment world - timing is everything, isn't it?

The myth of the social security trust fund died last week. The lack of candor not withstanding, on the part of his eminence - Easy Al Greenspan; enough layers of the onion were peeled back that it was revealed for once and for all - more rotten onion. Actually, for those who could still bear to watch and listen without crying, they learned that the system is, in fact, worse than broke. Admittedly, a heck of a lot of folks still don't get it. This fact is pointedly articulated by Jim Puplava in his Financial Sense Newshour [Feb 19 -1st hr] and his take on Alan Greenspan's semi annual testimony to law makers up on Capitol Hill last week. Listening to the Big Easy explain the state of solvency [or lack thereof] to the esteemed Congresswoman-D, N.Y., Carolyn Maloney last week provided us all [as if it was needed] with conclusive evidence as to the lengths he will go to - to twist, pervert and otherwise obfuscate our reality. I use the term "our reality" only because I know, in my heart of hearts, the man really knows better.

In this verbal encounter with the serpent, Ms. Maloney questions the two-headed snake as to whether or not the Social Security Trust Fund will in fact be bankrupt in 2042. In re-listening [that's listening for a second time] to the questioning, it should be abundantly clear to anyone else listening that she feels there is presently "money" in the Trust Fund. Now, for any of you who want to get into a he said/she said argument about how many times I listened or re-listened versus how many times you all listened or even had time to listen, let me simply say that is not the point I'm trying to make here at all. After all, we all lead busy lives and just yesterday I was really busy and had to get my car fixed. Do any of you realize how much an oil change and a good set of tires is going to set you back these days? Personally, I like Quaker State 10-W-30 and the Goodyears way more than the Firestones - but at what cost, I ask? Anyway, suffice to say, from where I sit; to allow this misconception [whether there is "money" in the trust fund] to perpetuate itself is indeed an act of gross negligence from a regulatory point of view - thanks for nothing Mr. Maestro.

The Knight the Lights Went Out In Washington - Rubinomics

At this point, I would like to take everyone on a little journey back in time. So wind your clocks and calendars all the way back to 1995, in the twilight of the first Clinton Administration. Sir Robert of Rubin was then Treasury Secretary and the U.S. government was facing default on its financial obligations due to a bitter, partisan debate causing delay on raising the debt ceiling. In the words of Robert Rubin himself in his book, In An Uncertain World, on page 170 he states,

"Without an increase, the federal government would hit the debt ceiling before the end of 1995, possibly as early as October. Default and the President being forced to sign an unacceptable budget were both untenable. We needed to find a way out, rather than simply hoping that at the last minute the opposition would blink and increase the debt limit."

The ultimate response to this dilemma is chronicled by Rubin, on page 172, where he reveals,

"It was Ed Knight, our savvy chief Treasury counsel, who suggested borrowing from the federal trust funds on an unprecedented scale to postpone default."

You see folks; as Mr. Rubin is well aware, the federal trust funds DO NOT AND NEVER DID CONTAIN ANY MONEY. These accounts exist in the minds of accountants and lawyers [ledgerdom] only. So here's what really happened:

Beginning Nov. 12, 1995, the Treasury started issuing government bonds, IOU's, and putting them in the Social Security Trust Fund "cookie jar" - with the Fed then PRINTING the corresponding amount of money they needed and called this a 'legitimate loan'. By accounting for their finances in this manner, the government got to understate their annual budget deficits by the same amount that they were burdening the cookie jar with IOU's - all the while dramatically increasing the unfunded [off balance sheet] liabilities of the government by the same amount. Where I come from, this is neither savvy nor a loan. It is better described as both treasonous and outright fraud. Here's the effect of what this paper shuffle maneuver did to the nation's money supply:

Fed Res. Chart compliments of Jesse: http://www.geocities.com/arthurcutten/jesse.html

The cunning of these cads is beyond moral outrage. This massive deception was being perpetrated under the guise of the Clinton/Rubin/Summers "strong dollar policy" with the Wizard, Easy Al Greenspan manning the printing press, aiding and abetting. What these clowns were really doing was completely and utterly debasing the currency, all the while, claiming inflation was under control. Well folks, in light of these facts, inflation never was under control. What you can rest assured of is its debilitating effects have been masked [through long suspected gold price rigging] and other crucial data gathered has been skewed [CPI and PPI doctored] to keep everyone in the dark and interest rates at unnaturally, some might say larcenous, low levels. In the wake of this blatant money printing, paper financial assets [NASDAQ and DJIA] first rose to contorted levels, followed by real estate, oil and then the rest of the commodities. As all this has been playing out, our beloved money maker, Easy Al, has been spouting off -telling us all that inflation is under control and he has even had the unmitigated nerve to tell us that elevated oil prices are a transitory phenomena? For those of you out there in the deflationist camp, I can only suggest you first look at this chart, then fold up your tents and move on over to the inflationary camp where the fire, she's a burnin.

Reality Biting Back

How many of you have ever heard the expression; a picture is worth a thousand words? Well, this one [above] graphically depicts what starts happening to your money supply when 1.5 TRILLION dollars created out of thin air. That's right folks, the Social Security Trust Fund "cookie jar" now contains 1.5 TRILLION dollars worth of Treasury debt IOU's and that same amount of money has been printed into existence by our good friends at the Fed at the urging of Treasury. No where else on this planet could such an unthinkable, deliberate financial hoax be perpetrated or tolerated. Thanks a heap Robert Rubin, Lawrence Summers, Paul O'Neil [to a lesser extent] and Johnny come lately Snow.

Have any of you ever picked up a book, started reading it, and simply couldn't put it down. Well, that didn't happen to me at all when I started reading Robert Rubin's book. In fact, it took me about a month to read the whole thing - it's pretty dry stuff. But I did make a few notes as I read. Upon further review of those trusty notes, I now seem to recall a few more meaningful revelations. Throughout his book, Rubin points out the importance of his choice of words, even as an ex-public servant, he highlights the importance of his inflection or tempo when delivering them. In other words, he "claims" that he chooses his words very carefully. By extension, one would assume he chooses the words he doesn't use very carefully as well. Then, on page 181, he relates to us all the manner in which Greenspan intentionally obfuscates facts when responding to direct questioning. He goes on to characterize a typical Maestro response, under oath, to explicit and direct Congressional questioning,

"That's an interesting observation you make, Senator, about the earth being flat," he'd say. "If I might, let me rephrase the question." Alan would then ask himself a completely different question and answer it with such complexity and finely calibrated nuance that the questioner faced a choice between nodding intelligently and acknowledging his own confusion. I must say that testifying next to the chairman, I was sometimes completely baffled myself."

You see dear reader; to these charlatans it's all a deceptive game. Ha Ha - the joke is on us! Then on page 194, Rubin asserts that,

"[by mid 1996] The growth rate was higher [read: hedonics], the unemployment rate lower [read: birth - death model], than prevailing views would have said was possible without igniting inflation [read: due to gold sales] by putting upward pressure on wages and prices. People were throwing around the phrase "new economy," suggesting that advances in technology had revised the familiar rules and limits. Some investors appeared to be falling prey to the timeless boom-era temptation that the business cycle had been tamed..." [RK emphasis]

To this I would offer the comment, what an appropriate use of the words "falling prey." We all have. The business cycle has yet to be repealed but has been knowingly cajoled by official sources through the insidious use of unregulated "off balance sheet" derivatives and varying degrees of intervention - both direct and indirect. It is this author's opinion that the dislocations caused by these alleged price riggers has indeed been so "glaring" that one of the conspirators felt compelled to write these words of acknowledgment. It has become customary, for this group of flim-flam artists to employ misdirection - while framing contradictory empirical occurrences as "productivity gains or enhancements", all the while seeming to scratch their collective heads as to exactly why irrational exuberance has set it. Failure to acknowledge the glaring and often contradictory phenomena would have, in itself, been tantamount to an admission of nefarious activity. In my mind, this incredulously weak and vague explanation - boom era temptations and new economy - from such a learned individual for events that have occurred is nothing short of preposterous.

It seems to me that the mindset at the Fed and Treasury might be best summed up by Robert Rubin as he reveals the motivation or drivers of crisis management in the interaction between himself, Lawrence Summers, the ESF [exchange stabilization fund], the IMF and presumably the Maestro at the Fed - during the Clinton administration. On pages 290 - 291 of his book, In An Uncertain World, referencing the Brazilian financial crisis of the late 1990s, Rubin outlines how very expensive "bad decisions" can buy time. Sometimes, he asserts, these bad decisions have a great deal of merit because they can,

"..Probably defer the impact of the collapse for six or eight months,
and that will more than justify the effort."

After reading this passage I could not help but ask myself if this type of thinking perhaps extends to the dollar and gold to this very day? It makes me wonder if we are today living on borrowed or bought time, compliments of a bunch of fiat worshipers who feel that "we all" lack the intellectual capacity to grasp the grand illusion being perpetrated? An uncertain world we live in indeed!

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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