My Two Cents - "TWIST & Shout"

09/22/2011

The mainstream media is abuzz this morning, Wednesday September 21st, about the federal reserve, who is once again plotting to save the USEconomy from certain disaster. Really, haven’t we heard this many times before? If it was that easy, shouldn’t it have been done a few years ago when all the problems started? If that is the case, we’ve got little more than a bunch of incompetent bankers on our hands. That is bad enough. However, I think most people are starting to understand that it is much worse a problem than just plain vanilla incompetence. It is about collusion and corruption and I am being very generous in that assessment.

The Latest Ploy

The fed is expected to announce this week that it is going to reach back 50 years into its bag of tricks and pull out some manipulations that will save us. This latest cockamamie scheme is to shift its $1.7 Trillion in short term USBond holdings (monetized debt) to longer-term holdings in an effort to drive down the long end of the yield curve even further. Apparently, the current monetization efforts haven’t been good enough. They have been driving the long end down for three years now, either directly through direct rate intervention or by subsidies aimed at the end products resulting from those rates such as mortgages.

The obvious rationale is that driving down rates on debt will rescue the economy, since people will be able to take on even more debt to spend more money on more imported trinkets from China and elsewhere. Again, haven’t we heard this before? We still haven’t really felt the full impact from the last raft of malfeasance when the fed went on an overt $600 Billion bond-buying spree. For those who haven’t yet connected the dots, that is called monetization of debt. A very inflationary measure. The dollar has paid the price. Don’t be fooled by the ridiculous assertions that the dollar is ‘stronger’ because the dollar index has gone up. The only reason that has happened at all is because Europe is on the brink of total collapse and disintegration. There is no way anyone can conduct a sane examination of the dollar’s fundamentals and conclude there is anything that represents ‘strength’ at this point. At best it is status quo and the capitalization of another’s even more dire circumstances.

On the surface, all this might look very appealing. Lower interest rates across the board. Sure, there will be another wave of refinancing of mortgages. If you can qualify. If you’re not underwater. Maybe. The subsidies aimed at the housing market so far have been an absolute and total failure. That dog won’t hunt anymore. Game over for real estate for at least a decade. So as usual, we’re left to ask Cui bono? Who benefits. Well the bankers of course. The fed dropped short-term rates into the basement in 2008 and has held the hammer down. This punished savers around the country. All those baby boomers who are retired/retiring (maybe) are going to need income from their meager savings to make up for the rising prices that have resulted from the fed’s malfeasance and lack of stewardship of the dollar. They won’t get much in the way of income from traditional low-risk investment vehicles, that is for sure. The proverbial ‘riskless’ asset pays nothing after taxes. Nothing. And it isn’t riskless. Put it another way – would you be willing to give the USGovt a loan for 90 days? 180? 10 years? How about 30 years? At maybe 2.5% per annum? That is a foolish proposition on even the best of days. The savers get creamed again. Bernanke is so worried about the economy, but yet he’ll purposefully and deliberately undertake policies that will gut the one component of the economy that is capable of spurring growth – savers. And this is not the first time either. And he is not the first guy to do it. This has been a pattern for quite a long time now.

The All-Important Question - Cui Bono?

So who benefits again? The banks, obviously. The lower the yield curve, the higher the spread, the higher the profit margin. All actions done so far have been to protect and enrich the banks and their precious financial system – all at the expense of the economy and all done intentionally, in my opinion, with malice and aforethought. Just think back to TARP, TALF, TSLF, and the other multi-trillion dollar rescue packages. Think about the $500 billion (minimum) in swaps done between the fed and the ECB in 2008-09 that Bernanke was grilled on and claimed not to know the recipients thereof. Think about the latest harebrained stunt aimed at saving European banks. More unlimited dollar bailouts for foreign banks. More protection of the financial oligarchy. More inflation. Less purchasing power for the dollar. More pain for consumers. Less economic growth.

At the bottom of this issue is that the Keynesian way is still in full force, which guarantees that things will not get any better. Two of the biggest pillars of the Keynesian way are to punish savers because saving is a bad activity - all monies should be spent on consumption to maximize current ‘growth’. Never mind future growth; all actions are to be geared towards the short run. The second big pillar is deficit spending and debt accumulation at all levels of the economy. Again, forget about the long-term consequences. All focus is dedicated to the short run. That is the Keynesian way in a nutshell.

The Consequences

We’re already seeing firsthand the catastrophic failure of that policy pathway in Europe. It is an unmitigated disaster. We’ll reap the full whirlwind here in America before too long. Instead of focusing on debt reduction across the board, the central planners, our new economic politburo, are undertaking policies that will accelerate debt accumulation at all levels. Consumers are back on the credit card big time as unemployment remains high and people are forced to continue borrowing to make ends meet. They were in over their heads to begin with and now for many, there is no way out. The house is underwater. The job is gone. The unemployment check isn’t enough and it is going to run out soon anyway. These people end up running full speed to the bankers who are more than willing to accommodate with rates of usury that would make the mafia blush.

The ‘cuts’ that are forthcoming from our new unconstitutional ‘super congress’ will almost certainly be from social programs, not the sacred cows such as the Pentagon budget, bank bailout monies, or subsidies paid for keeping jobs out of America. The lobbyists have already guaranteed that. I’ll say it again – the American people are the only ones who don’t have someone lobbying for them to the members of that ill-conceived and very illegal group. It is terribly ironic that the one group who is going to bear the full burden of all of this does not even have one representative in the process. We know what Jefferson said about that. If we don’t, then shame on us for not knowing our history.

The bottom line is that our debt is already unpayable. Our bonds are junk. Our country is several orders of magnitude deeper into this mess than Greece. According to Laurence Kotlikoff, the net present value of our obligations relative to GDP is 14 times greater. Greece’s multiple is only 12. Yet we had people surprised when our debt rating was cut by one single notch. It was an affront to our perception of American superiority. That is gone, people. We’ve allowed it to be squandered – all for the satisfaction of short-run desires and an economic philosophy that was brought into the world in the worst possible manner: half improvised, half compromised. The policymakers of the day provided the compromise; Keynes was more than happy to provide the rest. In a way, he got off easy; his demise came long before that of a world that decided to throw away prudence in pursuit of his unattainable utopia.

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.