"Paper money eventually returns to its intrinsic value - zero."
Last week's Honest Money Report discussed recent central bank actions, both here and abroad. Emphasis was placed on the Swiss Central Bank's recent announcement to monetize government debt; and how other central banks would most likely follow suit.
This subject is of grave importance, as it is directly joined at the hip with the present worldwide financial crisis - Siamese Twins of sorts: the Discouri Twins.
These two subjects go together as do cause and effect. Last week they were touched upon. This week we examine them in greater detail, but much work remains undone.
Upcoming papers will examine China's recent suggestion for a one world currency, which is discussed later in this paper. This subject has huge implications for the future of the world and warrants a thorough investigation. This is about more than money - freedom is at stake.
Other papers are planned that will examine Treasury Secretary Geitner's explanation as to what caused the financial crisis versus what Alan Greenspan had to say on the same subject for years on end. The two accounts differ and do not balance out. They actually contradict one another.
The present work reviews the FOMC's recent communiqué and the implications it has for the global financial system. We discuss how the Fed's monetary policies have a major impact on specific markets and asset classes.
China's statements regarding its significant holdings of U.S. dollars and its suggestion for a new world currency will be examined. All these topics are parts of a larger puzzle of considerable complexity.
We start with the latest Federal Open Market Statement.
For Immediate Release Date: March 18, 2009
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.
There is much here to digest. We will go back and forth to the Fed's statement, as the discussion warrants. One of this work's goals is to show the effect central bank policy has on the performance of various markets and assets.
None of what is occurring is by mistake. It is all by design - regardless of how it is spun. The more a web is spun, the more lethal it becomes; and the more entrapped are its victims.
All world currencies are paper fiat debt-money or irredeemable promises to pay. They cannot and will not be paid. The system is both illiquid and insolvent.
This is why our Founding Fathers stipulated in the Constitution that only gold and silver coin can pass as legal tender between the states. They expressly forbid paper bills of credit (promissory notes), which Federal Reserve Notes are at best.
In 1971, President Nixon, with help from Mr. Volcker, closed the gold window. The last tie between gold and money was finally severed. It was a horrific decision that lies at the root of today's financial crisis.
This is the direct cause of the financial crisis - paper money is debt; and debt cannot pay off debt; it can only transfer debt. It is the same process by which a bookie lays off risk.
A paper monetary system is inherently unsound. Witness today's unfolding events: i.e. the financial crisis. It is the death of paper money that is occurring.
The Constitution states that our money is gold and silver coin. If we would adhere to this time tested and honored principle, we would take the first step towards healing our monetary ills.
Anything else is futile and is not going to solve anything; it will only make matters worse.
One of the many symptoms of the weakening system is the race towards zero interest rates by central bankers around the world. The FOMC stated the Fed's policy for a federal funds rate at 0 to 1/4 percent.
Japan was the first to experiment with such misguided policy, and their economy and deteriorating financial system are proof that market intervention does not work.
Nonetheless, all central banks are in hot pursuit. Hubris knows no bounds. The Fed is trying hard to keep up with Japan's misguided deeds - it's what central bankers do.Discipline is not part of their nature.
The chart below illustrates the point.
Target Federal Funds Rate
So, just what are the Fed and other central banks up to? Things may not be as they so appear. The art of deceit is tainted with both illusion and delusion.
The primary job of the Federal Reserve is to supply plenty of paper fiat debt-money to the system, as this provides a huge wealth transference mechanism for the elite international bankers. The FOMC statement refers to this as: fiscal and monetary stimulus.
To start the ball rolling the Fed exchanges Federal Reserve Notes (non-interesting paying debt) for Treasury bonds (interest paying debt). The more FRN's created, the more T-bonds created; the more T-bonds created, the more FRN's created. It is a self-generating-perpetuating feedback loop that begs the question: what came first - the chicken or the egg? It is similar to parthenogenesis.
The chart below speaks volumes. The monetary base has exploded.
The Monetary Base
The Fed is the lender and now buyer of last resort; otherwise the system that makes its masters wealthy, crumbles at their feet. Central banking was created by elite international banking families - for their benefit.
As the saying goes: follow the money; so let's take a look at where the money has been going since (and just before) the financial crisis began.
By the implementation of an ever increasingly misguided monetary policy, the Fed and other central bankers are attempting to bailout an illiquid and insolvent system. They are frantically trying to keep the music playing in a dangerous game of musical chairs.
The music will keep playing until the currency is destroyed. When the music stops and the curtain falls, many will be left standing without a chair - literally. Call it fiscal and monetary stimulus if you will, but a fix is a fix, and eventually the addict dies from over stimulation - it's called over dose and results in being DOA. Paper money is terminally ill.
There are many highly regarded experts that believe the Fed is up to the task of keeping the game going. Janet L. Yellen, President and Chief Executive Officer Federal Reserve Bank of San Francisco stated on January 4, 2009:
"It is worth noting that, as a nation's central bank, the Fed can issue as much currency and bank reserves as required to finance these asset purchases and restore functioning to these markets."
While it is true that the Fed can provide any quantity of currency or bank reserves to the system it cares to, it must be remembered: by doing so, the Fed debases (destroys) the purchasing power or value of the currency (dollar).
This is easily illustrated by two examples: one is China's well-founded concern on the subject of the value of their huge dollar holdings; the other is the performance of the dollar: it lost 4% last week.
Since 1913, the year the Fed was created, the dollar has lost 96% of its purchasing power (value). This is total debasement and destruction of the currency, which is why many are questioning the viability of the dollar as the reserve currency of the world.
What is not recognized is that any paper fiat currency will have the same fate as the dollar: self-destruction from excess credit creation or monetary stimulus as the FOMC calls it.
In its vain attempt to stimulate the economy through monetary intervention, the Fed is destroying the currency (dollar).
Last week's market wrap covered the well-founded concerns of Chinese Premier Wen Jiabao. The following is a quote from last week's report.
"We have lent a huge amount of money to the United States. I request the U.S. to maintain its good credit, honor its promises and to guarantee the safety of China's assets. Of course we are concerned about the safety of our assets. To be honest, I am a little worried."
Is it any surprise that China has pulled the reigns in on their buying of U.S. debt? It would be more of a surprise if they hadn't.
As stated before: it is unlikely that China will become a net seller of U.S. debt. If they started selling U.S. debt en masse the value of the dollar would fall precipitously, and China would suffer huge losses. They would be hurting themselves in the process.
However, as the chart below shows, China may very well choose not to be the huge buyer they have been for years. The U.S. may have to find a new sugar daddy; and the Fed seems hell bent on fulfilling that role. It is a role they should not attempt. It will end badly. There is no need.
China's Treasury Holdings
Recall the FOMC statement that this report began with? It stated in part:
To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.
Ask any lawyer if up to means the same as did buy xyz amount. I think the two are different.
It's that old saying: black is white and white is black - the road to hell is paved by the art of deception. The first casualty in war is truth.
The point being - is the Fed buying all this stuff, or just saying that they might, up to a certain limit, if they so decide?
The next chart gives some clues.
Fed's Balance Sheet
It appears that the balance sheet total took a bit of a hit recently, although there was new data in at the end of the week that is not included. As we have seen: things can change quite fast.
The chart shows a third of a trillion dollar decrease in the Fed's balance sheet from its recent highs. Watch what they do, not what they say; and remember: black is white and white is black.
This doesn't mean that the Fed will not further expand their balance sheet, as they most likely will; however, it is what it is until it isn't. Eventually I think they are going to monetize debt to massive proportions. I hope I'm wrong. And remember: they have still increased it by a huge amount.
If the Fed does start buying debt hand over fist, they will do so to stop what they perceive to be credit contraction or deflation. If China and Japan, etc. do not step up to the plate and keep buying the obscene amounts of debt (T-bonds) they have in the past, interest rates will start rising.
The Fed will be forced to play the hand dealt. That's what happens when you back yourself into a corner. Wild Bill always sat with his back to the corner of the wall - except on that fateful day he got dealt a dead man's hand.
Could this be why gold and other commodities are beginning to rise? What if China starts moving into gold or commodities instead of U.S. debt? What if Japan does as well? The operable word is IF: little word - big meaning.
Since the crisis started the Fed has been adjusting its balance sheet. In the beginning stages it changed the composition of its balance sheet. Now, it is expanding its balance sheet.
The first process concentrated on the quality of assets, which were continually being debased. The second step adds an increasing quantity of expanding debt to the lethal mix. The Fed appropriately named the mechanism: quantitative easing. Believe me - they know what they do. That's the scary part.
In the first stage of the crisis the Federal Reserve relied on qualitative easing: it exchanged good assets (Treasury bonds) for bad assets, such as mortgage backed securities and other forms of toxic waste.
Included in this bacchanalian feast were the bad debts of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The Fed also bought securities backed by credit card loans, consumer loans, and student loans.
This was literally a bailout of the banking system. Good debt was exchanged for bad debt - bad debt that no other entity would dare buy. The Fed became the buyer of last resort. It may sound good - it isn't. It is akin to playing with fire in a room filled with natural gas.
And just how did the Fed go about accomplishing this? At first, Bernanke and his band of merry men used the staid and true tool of modern day central banking: repurchase agreements. However, it soon became apparent that this was not enough fire power to deal with the Sisyphean task at hand.
The Fed then implemented programs never before seen by mortal men: term-auction credits through the TAF (Term Auction Facility - how appropriate was that); as well as other securities by way of the TSLF (Term Securities Lending Facility). As I say: these guys are good at what they do, the problem is that what they do is not good for the currency or We the People.
Whatever criticism can be laid at the feet of the Fed, you can't say they lack imagination. These guys are not stupid - they are misguided by the unseen hand of those who hide in the shadows, shades of distant times still present. They do not easily stand aside. But the day of reckoning approaches.
The next chart shows the details of the first stage of the financial crisis and the entities it bred.
Federal Reserve Assets
Credit Extended to Financial Institutions
As the chart indicates, the Fed has continually debased the quality of the "assets" it holds; in other words - bad debt it accepted in exchange for good debt (T-bonds it originally held and exchanged for mortgage derivatives and other toxic waste).
This is far removed from sound monetary policy. The Fed's balance sheet exploded to 2.2 TRILLION dollars in a few short months. This is unprecedented action and will end in tears. There is no need. It can be prevented.
The next chart illustrates the decline in the quality of the Fed's "assets" from 2007 - 2008. It has since gotten worse - not better.
Balance Sheet Assets
Lehman Brother's bankruptcy triggered the second stage of the financial crisis. The Fed knew it had to do more than just change the composition of its balance sheet.
Plus, the Fed was running out of Treasury bonds to exchange for the bad debt no one else wanted to be contaminated by. Consequently, the Fed began to expand its balance sheet, which almost tripled from its June 2007 level. The boys dreamed up some schemes Timothy Leary would have been hard pressed to come up with.
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
AMLF was supplemented with the Commercial Paper Funding Facility (CPFF)
Special loans were gifted to AIG
The Fed purchased Bear Stearns assets that J.P. Morgan did not want and used our money to do so
Primary dealers can borrow directly from the Federal Reserve via the Primary Dealer Credit Facility (PDCF)
The Fed created the Money Market Investor Funding Facility (MMIFF)
Some of the above allow borrowing with asset-backed commercial paper as collateral; others allow unsecured commercial paper to be used as collateral; and others allow special purpose vehicles. These are the same types of toxic waste that got us into this mess. You cannot put out a fire by throwing more fuel on it.
The scary part is these guys know this. How do we know they know, because they invented and oversaw the entire process. Future reports and papers will show how Greenspan denied that any of this was occurring. He argued that derivatives did not need to be regulated.
Even more chilling is the fact that we accept it all, we accept the unacceptable. It's time for America to wake up - before it's too late. The clock is ticking.
The next chart shows how bad the Fed's equity ratio has fallen due to all the shenanigans.
The Fed's Balance Sheet
The upshot to all this is that you can count on them to be them. The Fed will continue to do what it does: create more debt by creating more credit and money - obscene amounts of the stuff, all in a vain attempt to put the raging fire out by throwing more fuel on it.
It is true that deflationary forces are running amuck. This is the invariable bust that comes after every boom caused by misguided monetary policy and market intervention into what is supposed to be a free market. It is not. It is a highly manipulated and screwed up market. If it walks and talks like a duck - it is a duck.
The Fed is trying to walk the hire wire. On one side is deflation, and on the other side is inflation that can quickly turn into hyper-inflation. The Fed's balancing bar is its juggling of trillions of dollars that represent We the People's life energy focused as work. Dangerously below the abyss waits, jaws wide open. The Fed best not slip.
For now the Fed's actions seem to have somewhat filled the void left by the deflationary collapse of the bubble it created. Central bankers are using powerful and dangerous monetary tools - processes that once unleashed may be impossible to reign in when the time comes; much like putting Pandora back into her box.
In chaos theory it's known as breaking the bifurcation point. Once this happens, runaway vibration manifests, which will not end until it plays itself out and dissipates. The best we can do is to be prepared and expect the unexpected. The death of paper money and the unsound system built upon it is occurring before our eyes. Gold has sensed this for years - other commodities may be starting to pick up the scent.
Gold's big move last week was supposedly caused by the central theme of this paper: the Fed is debasing the U.S. dollar and destroying its purchasing power; which in turn destroys the financial system and the economy based thereon. It is a transfer of wealth from the many to the few.
Last week the Fed announced that it will monetize Treasury bonds, as the Honest MoneyGold & Silver Reports have discussed for months. The reverberations could be felt in the dollar (down), gold (up), and other commodities (up).
It is interesting to note that in past reports we have talked about the relationship between the dollar and gold. It used to be an inverse relationship.
This year gold and the dollar have been tracking one another in the same direction. Last week they parted ways. It remains to be seen if this is a one night stand or a long term relationship. Love can be a fickle thing.
Note that the gold stocks rallied over 13%, while gold was up 2% and silver 4%. It has been awhile since the stocks have led physical up. This could be the start of the stocks leading the metal up during the next phase of the gold bull.
The next leg up may be kicking at the door. It should be an interesting week coming up. When physical closes above the Feb. high just above $1000 - the next leg up begins (unless we get a false breakout). Gold will likely undergo a short term correction to digest its recent gains.
Tiny Tim is about to unveil another Hail Mary Pass that may look good while in the air, but it will land with a thud. Hopefully, it will not crash and burn. See the EU Presidents thoughts on the subject at the end of this paper.
The latest news concerning the new world order came out of China this week. Mr. Zhou Xiaochuan announced that the People's Bank of China (central bank) wants to see a new world reserve currency other than the U.S. dollar.
This is not a new idea. Many countries and other international entities have been calling for such a change for years - decades actually. It is all part of the plan: the New World Order plan. This should be taken seriously - it is.
Even if the various world powers agreed to a new reserve currency, the creation and implementation of such a plan will take years. This is not going to happen overnight - if it ever happens. I don't think it will. I believe that honest men will triumph and honest money will return as the sovereign of sovereigns.
China holds a vast amount of U.S. dollars - something on the order of $2 Trillion in currency reserves alone. They are not going to shoot themselves in the foot by taking any hasty action that would put a large hole in their bottom line.
This idea did not originate in China; it originated with the elite international bankers who created central banking for a specific purpose: to function as a wealth transference mechanism from the many to the few.
Mr. Xiaochuan's opening remarks were:
The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question, i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above question, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.
Later in the same statement, Mr. Zhou Xiaochuan reiterates the weaknesses and inherent flaws in the existing global monetary system:
While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.
Mr. Xiaochuan believes that the global monetary system is weak and unstable. He states that the global crisis is a direct result of the inherent flaws in the system, emphasizing that credit-based currencies, such as the U.S. dollar, are inherently deficient and cannot properly function as a global reserve currency.
I wholeheartedly agree with his first position, and in large part with the second; however, there may be more wrong with the system then just the fact that the U.S. dollar is the reserve currency.
Although Mr. Xiaochuan alludes to the correct problem, he does not fully develop it; nor does he realize that it is the key weakness that makes the existing system so unsound, as illustrated by the present financial crisis.
The point missed is that all world currencies are paper fiat debt-money; they are all credit-based currencies where debt is money and money is debt.
This is the basic flaw with the world's monetary system: it's not worth the paper it's printed on. It is not possible to pay off debt with debt. Such a system only allows debt to be transferred.
Zhou states that credit-based money is one of the problems with today's global monetary system:
The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.
And he is correct in this assessment, but he should carry the premise through to its final conclusion. The fact that the U.S. dollar is the reserve currency is not the basic flaw of the system. All world currencies are paper fiat debt-money or credit-based currencies as he refers to them as; and any and all of them would fail as the reserve currency of the world.
It is the fact that all existing currencies are credit-based paper fiat money systems that is the core problem.
And just how did all currencies become paper fiat credit-based systems? The IMF that Mr. Xiaochuan proposes to lead the new world order played a major role in creating the present monetary system that is falling apart at the seams. His selection of a leader leaves much to be desired, unless one is on the road to hell.
The IMF Articles of Agreement Rule 4-2b states that no member country can have a currency that is backed by gold. Gold was the anchor that kept paper money from completely self-destructing, as it is now. Why did the IMF choose to outlaw it? And do they have the authority to do so?
(b) Under an international monetary system of the kind prevailing on January 1, 1976, exchange arrangements may include (i) the maintenance by a member of a value for its currency in terms of the special drawing right or another denominator, other than gold, selected by the member, or (ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or (iii) other exchange arrangements of a member's choice.
The U.S. Constitution mandates that gold and silver coin is money, and that no bills of credit are to pass as legal tender. Yet that is exactly what we have today, as Federal Reserve Notes are bills of credit or paper money; while gold and silver coin is not accepted as legal tender between the states.
The existing system is upside down and inside out from what the Founding Fathers stated. For the IMF to limit any member country from not using gold as money is to go directly against the U.S. Constitution.
Then why does the U.S. go along with such an unconstitutional mandate? Why should a sovereign state listen to what the IMF or any other international or transnational entity says? And furthermore, why does Zhou talk about sovereignty? Cui Bono?
A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity.
This is the same ploy the Euro used: it usurped the national sovereignty of all member nations. Why? Why do the elite international money interests want to break down nation-states? Cui Bono?
Whoever controls the one world currency would effectively control the world, as they would be in control of the money power - a control no such entity should have. The money power should reside with the people, as the people are the market - it is the individual who is sovereign. This is what it means to have inalienable rights as the Declaration of Independence states.
Governments or transnational institutions do not produce goods and services sold in the marketplace. Why should they be in control of the money power when they do not contribute or produce anything bought or sold in the market?
They literally have no business with the market; and should not interfere in what is supposed to be a free market - not a market that is continually interfered with by central bank intervention. It is clearly evident that such policies do not work; all one needs to do is look around; or read one's retirement statements to see the ugly facts of wealth transference before their eyes. The IMF is a dead man walking.
Mr. Xiaochuan then propose that the IMF's special drawing right (SDR) should be used as the new world reserve currency. Although he talks about it, he seems to selectively forget that the SDR is a basket of paper fiat currencies: all of which are credit-based paper money.
Zhou is offering to fix what he referred to as the risks and deficiencies of credit-based currencies by using the same exact thing but in basket form. It reminds one of a basket case. Zhou either doesn't know what he is talking about; or he is an accomplished artist.
More will be said on this subject in future papers. I plan on going through the statement paragraph by paragraph with comments and discussion of all points raised. For now the above will suffice.
This paper will conclude with a very recent quote from the President of the European Union, Czech Prime Minister Mirek Topolanex who said:
"The United States did not take the right path" regarding its plans to deal with the financial crisis.
"Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the liquidity of the global financial market."
The punch line that summed it all up very succinctly was: "all of these steps, these combinations and permanency is the road to hell."
Well put. He is a smart guy with the heart to stand up and be counted. The blowback will be important to watch. Hell has a funny way with fire.
The answer to the debt crisis is to restore gold and silver coin as money - honest money, by weight and weight alone: honest weights and measures.
Anything else is not according to the Constitution and will not work. You cannot pay off debt with debt. Gold's time has come. The world needs gold. The world needs honest money.
"And the devil that deceived them was cast into the lake of fire and brimstone, where the beast and the false prophet are, and shall be tormented day and night forever and ever."
Good luck. Good trading. Good health.
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