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Make note of this date – March 18th, 2009.   100 years from now, historians will point to it as the day the United States of America sealed its’ fate.

Today the United States shifted from a long slow decline into high gear – and nailed the accelerator pedal to the floor.  There are several other dates which may be picked as well, such as the AIG bailout on September 16th, 2008, or even the Bear Stearns bailout on March 14th, 2008, but today is the one that should be remembered.

It should be remembered as the beginning of the end, because today, for the first time, the Federal Reserve announced that it is going to directly purchase US Treasuries.  $300 billion worth – and that’s in addition to $1 trillion in mortgages.  The full text of the Fed announcement is here.

Here’s an important 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. [Emphasis mine]

The term “increase the size of the Federal Reserve’s balance sheet” is a euphemism for “create money of out thin air” – or as it’s more commonly known – printing money.

It’s time for a refresher in basic economics – although this isn’t in Econ 101 – but it should be.  In the past, the Federal Reserve served simply as a clearing house for banks.  They would lend money to banks, but they effectively “held the mortgage” on whatever collateral the banks put up.  The collateral was commonly US Treasuries, although it could be almost any asset.  So the Federal Reserve might do something like take $100 million in US Treasuries from Bank of America and in return the Federal Reserve would give the Bank of America $100 million in US dollars. (Hypothetical situation)

They printed up $100 million to loan out, but they received $100 million in assets, so the net effect on the balance sheet of the Federal Reserve was zero.  This is important – please re-read that if you don’t understand the process.  No money was created that didn’t already exist.  In the hypothetical example above, the Bank of America gave the Federal Reserve $100 million in the form of US Treasury bills, and the Federal Reserve gave them $100 million in cash in return.  The Bank of America can now loan out that $100 million to others – something they couldn’t do with a Treasury note.

But the net effect on the balance sheet is zero.  No new money was created.  It all existed in some form before the transaction, so the net effect is zero.  You can’t give the local grocer a US Treasury bill for a loaf of bread – you can give him dollars.  That’s what the Federal Reserve effectively did – they provided a liquid form of money (dollars) in exchange for illiquid money in the form of Treasury notes.

Got it?  Ok, read on….

Another part of the announcement says 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.

You really need to understand that the Federal Reserve doesn’t actually have any money, so when they “purchase” something – as opposed to normal lending – with what do they  purchase it?  The answer is really simple – they make up money.  They create it out of thin air.  Unlike the example above, this money isn’t backed by anything.  Nodda.  Zilch. Zip.

They simply make a few keystrokes and “create” more US dollars.  This is the electronic way to debase the currency.  The Romans did this by alloying other metals such as lead into their gold coins.  The end result is the same.  Inflation.

When you make each coin (or dollar) worth less, you are expanding the supply of money.  The amount of goods in the economy hasn’t changed at all.  If you read through an earlier post of mine, you’ll see that money is simply a way to facilitate transactions – but all money needs to represent actual goods produced that have not yet been consumed.

When the Federal Reserve buys US Treasuries, they are doing the same thing that the Romans did – causing inflation by debasing the currency.  It’s the law of supply and demand.  The Federal Reserve announcement today directly expanded the money supply by $300 billion.  That’s why gold soared today at the exact time of the announcement.

US Treasuries also soared on the news, but that will prove to be short lived.  It will be short lived because traders will realize Treasuries soared because the Chinese have dramatically slowed down their purchases of US debt – and their initial joy that someone is going to purchase the treasuries will fade when they realize that the purchases are being made with funny money.  The Chinese have made it clear that they won’t sit by idly and watch the value of their investments be debased by US policy.

Here’s a link to a NY Times article with a few different takes on the news.  It’s good, read it.  A few choice quotes are copied here:

• Although the notion of quantitative easing has been much discussed in the past few months, the policy clearly took effect today. Many thought it would never come to pass. In many ways this is a tragedy that could have been avoided. (Joseph Brusuelas, Moody’s Economy.com)
• Today’s announcement that the Fed is committed to purchase more than $1 trillion in Treasury and agency debt is great news for current holders of those instruments looking to bail out, but horrific news for just about everyone else, particularly long-term holders of U.S. dollars-based assets. (Peter Schiff, Euro Pacific Capital)
• But by being the buyer, not just the lender, of last resort, the Fed has laid in a course that can only lead to ruin for the U.S. dollar. (Peter Schiff, Euro Pacific Capital)
• Adding up these programs puts the Fed’s balance sheet somewhere around $4½ trillion before the end of this year… We think the Treasury rally will be short lived and see these purchases as negative for the dollar against foreign currencies and gold. (John Ryding and Conrad DeQuadros, RDQ Economics)

If you’ve read this far I congratulate you.  If you read through this looking for advice on what to do with your money, or what the stock market will do, here’s my take.  This advice is free and worth every newly debased penny.  Go long on anything that’s sold in dollars, because as each dollar becomes worth less and less, the value of those items is more and more when measured in dollars.

Buy gold.  Buy silver.  Buy oil. Buy the Euro, the Brazilian Real, the Chinese Yuan – and short the dollar.  The dollar is officially toast.

I’ll end with a note that I REALLY hope I’m wrong.  I hope that the US isn’t headed down the path to inflationary ruin.  But that’s just hope.  My head says that this is the beginning of the end of this brief experiment, and that the United States as we know it will cease to exist at some point in the next 10 to 20 years.  Damn I hope I’m wrong….

gk

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Like many of you, I just watched Helicopter Ben’s interview in 60 Minutes.  Here’s a quote from the transcript on 60Minutes.com that struck me:

Asked if it’s tax money the Fed is spending, Bernanke said, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.”

Hey Ben, why not simply “mark up” the size of every one’s accounts?  What’s that you say?  You can’t do that because it would cause the value of the dollar to drop immediately?  And by creating (printing) money just for the banks, you slow down that process? But guess what – you’re simply delaying the inevitable.

The interview continues…

“You’ve been printing money?” Pelley asked.

“Well, effectively,” Bernanke said. “And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”

They’ve been printing money (as I’ve said all along) and they plan to stop printing when the economy recovers.  Anyone want to bet on that?  Have anyone – ever – seen a government bureaucracy do something right?

Yeah, that’s a rhetorical question.  I may have more to say about the interview later, but this part really struck me because it’s so stupid.

Just let the bad banks go broke.  The few good ones left will buy up the good assets cheap, and the bad investments (and those who made them) will be gone.  Problem solved.

gk

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It’s hard to believe that Federal Reserve Chairman Ben “Helicopter” Bernanke is actually as dumb as his statements make him sound.  In his testimony to the Senate today, he said that if the government purchases common shares in banks, that it “may or may not” have an impact on shareholders.

Has he never heard of supply and demand?  Whenever the supply of something is increased, each individual part of the “something” is worth less.  This holds true for everything from apples to zebras – and I’ve never seen an exception to that rule.  But Ben doesn’t seem to understand that simple concept.

According to MarketWatch.com, Bernanke spoke in response to questions raised by Sen. Bob Corker, R-Tenn., who expressed concern about how conversion of government capital infusions into common shares could have a negative impact on existing common shareholders of financial institutions. However, Bernanke argued that once converted, the government common stakes “may or may not” dilute common shareholders depending on expectations of the equity shareholders, Bernanke said.

At least Corker and Grassley are now saying the right things.  Hopefully they’ll keep their recently grown backbones and continue to hold these appointed officials accountable.  They didn’t have the backbone to stand up and say this when Bush was president, and I don’t care if political differences cause them to do the right thing or if they figure it out on their own.  Doing the right thing is what matters in the end.

Bernanke simply can’t be that dumb, but he sure plays the role of a dumbass well.

gk

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WTF is Bernanke smoking?  Is “Helicopter” Ben Bernanke looking at the papers – or using them for rolling papers?

According to a story on MarketWatch, Bernanke is quoted as saying “We have been encouraged by the responses to these programs” and “I think the actions that were taken prevented a much-worse situation — a meltdown that would have led to a catastrophic and long-term low level of activity“.

Which markets has he been watching?  We’re having a meltdown right now, and I think we’re in about the 3rd inning of a 9 inning game.  The Fed’s interference in private markets – especially propping up bad banks – is making the “catastrophic” situation worse long term.  I think his actions in part created the current problems, so why in hell are we thinking he knows how to fix them?

The current mess is easily traced back to government interference in private markets, starting with a Clinton administration policy of pushing banks to give loans to those who would otherwise not qualify.  It was greatly exacerbated by Alan Greenspan’s cheap money policy instituted after the tech bubble and 9/11.  And it’s gone to hell in a hurry because of the trillions in bailouts under Bush/Obama.

Here’s a listing of how the $9.1 trillion in bailout money (as of last week) has been wasted.

A friend of mine posted this on a Facebook page earlier today, and I’m going to shamelessly steal it to emphasis how much of our money Bernanke (under Bush/Obama) has blown.  I haven’t verified any of these numbers, so let me know if any are wrong and I’ll correct the post:

People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.

TOTAL: $4.6165 Trillion dollars

But yet Bernanke says “So far, so good!”

He’s a bigger idiot than his former boss – and that’s tough to beat!

Another quote from the MarketWatch story.  “And we are using whatever means we have to overcome what has been an enormous blow from this financial crisis.”

Evidently “whatever means we have” includes destroying the free market system, converting us entirely into a welfare laden socialist state, and inflating the dollar until it’s worthless.  Intended are not, Bernanke’s actions will have consequences.  And they won’t be good.

gk

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According to a report on Reuters, the new “TARP 2.0″ bailout package won’t include a provision for a “bad bank”.

A so called “bad bank” is an idea that has recently been floated.  In effect, the bad bank would buy up all the toxic crap from other banks, leaving them with nice clean balance sheets.  But who pays for the toxic crap?  That’s the problem – we all would.

Trillions and trillions would be required to buy up all the bad mortgages and derivatives.   No one – not even China – has those kind of reserves.  Even if some country had that kind of money, why on earth would they invest it in a bad bank?

Since no rational person or country would ever do that, the US government had volunteered you and me to do it.  But since we don’t have the money either, it would simply be printed out of thin air.

With any luck at all, this report is accurate and the dumb idea of a bad bank will be buried forever.  After all, don’t we already have enough bad banks?  Do we really need another one? 

gk

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Here’s an update on a post I made last month.  It’s an account of the actual dollar amounts given to various recipients of bailout money according to CNN.  Click on the plus signs to expand the lists on the CNN site.

Here’s the complete list as of today.  Yeah, it’s really ugly formatting but I’m too lazy to fix it right now. (Fixed it up a bit on 1/14)  Suffice it to say that the feds have blown a hell of a lot of money trying to save companies that deserve to be broke and out of business.  Go ahead, find your bank, broker, and/or car company on the list!

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According to CNN “Zimbabwe’s central bank will introduce a $50 billion note — enough to buy just two loaves of bread — as a way of fighting cash shortages amid spiraling inflation.”

Inflation in Zimbabwe is officially running at 231,000,000%.  That’s not a typo, it’s 231 million%!

Unfortunately, they got into this doing the same thing we’re doing – printing money.  Don’t believe me?  Here’s what the Reserve Bank of Zimbabwe has to say (according to Financial Sense) in a statement:

“Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their national interests.

That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.”

There you have it – Helicopter Ben Bernanke’s policies have been endorsed by the Governor of the Reserve Bank of Zimbabwe.  Ben must be so proud to have that backing up his inflationary policies.

Search this blog and see how many times I’ve said this same thing.  I’ve been consistent on this, and sometime within the next few years, I’ll be proven correct.

gk

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Helicopter Ben Bernanke is keeping his word that he’d “drop money from helicopters if necessary”.  And that’s not a good thing.

The Fed today dropped the Fed funds rate to a target “between 0% and .25%” – in effect, they’re giving away free money.  A bank can take a 30 day loan and pay ZERO interest on it.

A bank can take a zero interest 30 day loan, repackage it to you as a mortgage at around 5%, then sell your mortgage to Freddy Mac or Fannie Mae at about 4%.  Presto, they’ve locked in a 1% gain in 30 days – with ZERO risk.

Of course they don’t make much money if they only borrow $100K, but you could make a nice income turning over $100 billion a month….  Of course you and I can’t do that – the Fed only makes loans to banks.  You and I aren’t special enough to get those rates.

Note – I don’t want those rates.  I don’t want anyone to get those rates.  Because a zero percent interest rate plus the trillions the Fed is printing up in funny money is a sure fire recipe for inflation.  Maybe not today, maybe not in 2009, but it will happen.  There’s no way around it.

When that happens gold will go to over $2000/oz.  Oil will be $150/barrel.  Corn will be $10/bushel.  Gas will be $5/gallon.  And because the dollar itself will have lost value, this time the prices won’t go back down.

According to the NY TImes, “Far more important than the rate itself, the Fed bluntly declared that it was ready to move to a new phase of monetary policy in which it prints vast amounts of money for a wide array of lending programs aimed at financial institutions, businesses and consumers.“

You can read the actual text of the statement from the Federal Reserve here.  In it, the Fed says that they are likely to keep “low levels of the federal funds rate for some time.“  In other words, they’ll keep it at zero for the foreseeable future.

The Fed statement also said “the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.”

Sounds like mumbo-jumbo to you?  What it means is that the Fed will print money to purchase bad debt from banks, Fannie Mae, and Freddie Mac.  And guess what ALWAYS happens when a government prints money out of thin air?  Inflation – and it can lead to hyper-inflation if they go too far.  And going too far is inevitable for the government.  (I’m thinking of the WalMart slogan right now – Always!)

So if you have any sense at all, tomorrow morning you’ll be selling stocks (if you have any left – I sold mine last year) and buying gold, oil funds, wheat, corn, etc.  Basically anything that has limited supply that’s sold in dollars will be worth more next year at this time than it is right now.

Note that this doesn’t apply to houses or cars!  We still have an oversupply of them, and the price for them will continue to drop for the foreseeable future.

That concludes today’s lesson.  Please email or comment if I wasn’t clear about anything. 

gk

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I ran across this in today’s Daily Reckoning.  It’s a snip from Bill Bonner’s article titled

The Fall of Wall Street: Innocent Frauds and Armed Robberies

It’s good stuff!  Please take a minute to read it because it explains a lot in just a few paragraphs.

gk

From the day of its founding in 1913, the Fed’s assets – the foundation capital of the U.S. banking system – grew, reaching $1 trillion on the 24th of September, 2008. But then, something extraordinary happened. Something breathtaking. And for a classical economist – something incredibly reckless. In the next six weeks, the Fed added another trillion. And the head of the Dallas Branch of the Fed said that he expected to add another trillion before the end of the year.

How does the Fed get these “assets?” Simple. It buys them. Where does it get the money to buy them? Simple again: it creates it. It makes it up. It conjures it out of nothing.

“If it comes from nothing,” you might wonder, “what could it really be worth?” But we’re not going to answer that question. We don’t have time. Besides, it takes us in such a deep metaphysical swamp, we’re afraid we may never slosh our way out…or at least not get out in time for lunch. Instead, we’re going to answer this question:

“If it was that easy, how come the Fed didn’t do it before?”

The answer to that is simple: because when the Fed inflates the money supply it risks inflating consumer prices. People don’t like that. They like it when asset prices go up. But not when gasoline and milk increase.

But now, no one is worried about consumer prices. In fact, the Fed is worried about deflation…about falling prices. Bernanke knows what happens when consumer prices begin to fall. Consumers stop spending – knowing that they will be able to get a better deal in the future. That further depresses the economy…and pretty soon it’s the ‘90s again and you’re back in Tokyo. So the Fed has begun a huge program of monetary inflation, intended to offset Mr. Market’s price-cutting.

And now another question: Isn’t there some risk that the Fed will overdo it?

Oh, dear reader…that’s a puffball of a pitch. If we can’t hit that, you can take our laptop away…you can break our sword…and send us back to the dugout.

Remember what happened in the slump of the early 2000s? Alan Greenspan panicked…cut rates to 1%…and left them there for more than a year. He gave the market the wrong medicine at the wrong time…and then delivered such a horse-sized dose, it set off the biggest bubble in mankind’s whole bubbly history.

Now, it’s a different kind of slump…a credit slump. And once again, the Fed is on the scene, like a quack doctor at the side of a heart-attack victim. This time, he’s giving stronger medicine…not just a 1% lending rate, but actual monetary inflation. Trillions of dollars worth of it.

For the moment, Mr. Market is taking away dollars faster than the Bernanke Fed is replacing them. That could continue…for a few months…or even for several years. But it won’t continue forever.

And here, we affirm our unshakeable faith in the people who lead us. They are trying to cause inflation. Eventually, they will get the hang of it. They may shoot for 2% per year; but they are sure to overshoot. Money printers always do.

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The Office of Thrift Supervision shuts down mortgage lender IndyMac and transfers the operations to the Federal Deposit Insurance Corporation.

That’s the headline from a CNN story dated 7:30pm today.  The story goes on to say “This institution failed today due to a liquidity crisis,” OTS Director John Reich said.

I just posted an article about inflation entitled “Sound Familiar” but does the quote above sound familiar?  It should, a liquidity crisis is what killed Bear Stearns, and that’s what’s caused hundreds of financial institutions to fail over the past year.

The next line of the story says IndyMac had $32.01 billion in assets as of March 31.

For comparison, here’s what Fannie Mae and Freddie Mac have according to a story on Bloomberg: Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae’s assets tumbled 66 percent to $12.2 billion and may be negative next quarter, Poole said.

The official line (in the same story) says Fannie Mae “has access to ample sources of liquidity, including access to the debt markets,” Chuck Greener, a spokesman for the Washington-based company said in a statement today. In a separate release, McLean, Virginia-based Freddie Mac said it’s “adequately capitalized, highly liquid and an essential part of the nation’s housing system.”

I know it’s getting overused by me tonight, but does that sound familiar?

Here’s a hint – the chairman of Bear Stearns said they had plenty of liquidity on a Wednesday.  The company no longer existed the next Monday.  We’ll find out in a couple of days, but I think something is going to happen with Fannie and Freddie over the weekend.  I wouldn’t be surprised to see them under some sort of special operations on Monday – with their stock basically worthless.

I wonder why the OTS waited until after the market closed to announce it?  Do you think they’re trying to bury things over a weekend and hope everyone forgets by Monday?  I know some people may be that stupid (hello Ben Stein!) but I would hope that most of us have the sense not to run back into the burning building.

In case anyone is wondering, I really don’t want the markets to crash.  I have most of my money in a 401K with very limited options.  I can’t short stocks or funds in it, and I only have about 10 funds to pick from, so I only make money when the market goes up. 

That being said, I do expect the markets to crash at some point.  Most of my 401K money is in a money market fund while I wait it out.  The longer the Fed drags this crap out, the longer I have to sit on the sidelines and watch inflation eat away at my savings. 

I want to get back into the market (I got out last year) but getting in right now would be the same as running into a burning building.  Or catching a falling knife.  Or beating my head against the wall.  It just doesn’t make sense at this time.

So if the Fed would stop delaying the inevitable, I could put my money back into the market after it crashes.  Except they keep stopping the crash, which simply drags it out and makes it more painful. 

Note to Helicopter Ben – let the fricking market weed out the bad institutions on its’ own.  The bad ones will disappear (266 and counting according to ml-implode.com) but the good ones will emerge with clean balance sheets, ready to make big profits again.  And I’ll be able to watch my money grow instead of slowly withering away into nothing because of the Feds’ inflation.

gk

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