Fed’s Free Money Isn’t Really Free
By now everyone has heard of the Federal Reserve’s free money policy where the Fed loans money to its banking buddies at or near 0%. This is a great deal for the bankers, but free money isn’t really free, and it eventually kills anyone holding on to U.S. dollars. Jim Willie of Goldenjackass.com has written an excellent article on what 0% interest rates really mean to you and me. Mr. Willie (who holds a PhD in statisticts) is today’s guest writer. If you invest in gold or silver you need to read this all the way to the end. Enjoy. –Greg Hunter —
The High Cost of 0%
By Jim Willie, Guest Writer for USAWatchdog.com
The interminable extension by the US Federal Reserve on the 0% rate into 2014 represents history in the making. It is the adoption of pure heresy in monetary policy, making it mainstream. Worse, it forces foreign central banks to adopt the same destructive policy in the Competing Currency War. Once upon a time, the highest priests from the central bank would admit in a guiding tone that accommodation on interest rates must be temporary. Nowadays it is engrained in the market mindset and permanent in monetary policy. The chronic 0% means the entire financial and monetary system is totally irreparably broken. The old pendulum where the tilt was toward bonds during recession, then toward stocks during recovery, that is all gone, shattered by the endless financial crisis. One must incorporate a new thinking, that the entire financial and monetary system is totally irreparably broken, then adapt in fierce defense. Larry Fink of Blackrock private equity firm made news today by suggesting that 0% bond yields offer no return on investment. How true! He did not offer any accurate reflection of reality that the financial structures are broken, nor that all attempts at remedy were flimsy and misdirected. He gave the ALL IN signal for buying stocks in 2012, thus putting on the risk trade. The immediate ancillary signal is to back up the truck and load up with GOLD also.
Many are the messages behind the 0%. Other nations have been criticized for its adoption. But when the United States is the adoptive parent custodian, it is supposedly all good. So Orwell lives, and the ghost of Goebbels floats. Stimulus is a ruse, as destruction of working capital is the constant refrain in a tragic opera. The unintended consequences abound, but mostly not perceived or comprehended well. Few even in the financial community are aware of the powerful leverage mechanisms that enforce the artificially low interest rate. Introduce the Interest Rate Swap contract, whose devices were deployed to the tune of $8 trillion worth in the early months of 2011. The public was told the USGovt debt downgrade at the hands of Standard & Poors was contradicted. Nonsense!! The Interest Rate Swap went to work overtime, and the S&P executives were forced out of their leather chairs and marbled offices for their insolence. While Europe is embroiled in austerity, the United States is besieged by central bank apologies for failure disguised less and less with each passing month and each dismissed speech.
The solution is Gold & Silver investments, as all things paper will lose value either from erosion or theft in fraud. The MFGlobal case is far from finished. We have seen this Madoff movie before, but few recognize its sequel starring Jon Corzine and similar supporting cast. The transfers of money immediately before the MFG bust indicates up to $108 billion of money might have been stolen, not $1.2 billion or even $600 million. The Madoff losses are also triple the official $50 billion figure. The crime scene looks like a parallel. The protection is Gold & Silver, and certainly not with futures contracts spewed or tethered from the tainted COMEX arena. The next wave will feature the Gold investors painted as financial terrorists. Refer to the New York Times article with FBI contributors. This is highly disturbing to anyone who holds the Constitution in hallowed terms.
HIDDEN MESSAGE OF PERENNIAL 0% RATE
The 0% official Fed Funds rate has been almost three full years in entrenched policy, when originally promised as temporary. No exit strategy here. Greenspan once stated that it should never be held fixed so low for more than six to nine months. He implied the system would be broken otherwise, subjected to pressures that would distort the valuation mechanisms beyond repair. My view is that extending 0% as monetary policy into year 2014, five years of accommodation, is a gross admission of failure. Bernanke constantly apologizes for stimulus having failed, for an economy unable to recover. The main effect of 0% policy is sustenance of the surprising weakness, draining capital from the system, and improperly pricing the debt which is at high risk. The reality is that the USEconomy is stuck in harsh deep recession of minus 3% to minus 5% GDP. The reality is that the USGovt debt burden is stuck in fast escalation at well over $1 trillion annually, while demand for the debt securities is vanishing. What remains is the Quantitative Easing, a bizarre term to give respect to abject monetary hyper inflation by any other name. The heavy hidden reliance upon monetary inflation devices has become a fixture in the financial landscape. Its marquee banner reads failure.
JAPAN CRITICIZED FOR ZIRP AND QE
United States is vulnerable to much worse criticism than Japan. For many years, the cracks and criticism, laced with disrespect, have been lodged at Japan for their lost decade. The US on the other hand, had a Stolen Decade of Prosperity in 1990. Harken back to the pilfered Fort Knox gold treasure, the absent inspections from independent audits, the vacating of the fort and its replacement with nerve gas, long after the futures contracts and 0% gold lease rate was installed that enabled a few $trillion in illicit Wall Street profits, tucked away in untouchable offshore accounts. The Japanese demonstrated how the 0% rate is permanent, the Zero Interest Rate Policy fixed once installed. They still have it. The little powerhouse in Asia cannot move out of the zero percent corner. They have advantages like trade export surplus, a vast industrial sector, and nationalist mindset that abhors outsourcing. Ironically, the 0% rate was enforced in Japan by mandatory postal union pension support of government bonds, and other pension systems directed toward government bonds. In the United States, the dependence has been on hidden usage of the printing press, secretive QE programs with deceptive cloud cover like Operation Twist. The USGovt will soon resort to forcible investment of pension funds and possibly bank certificates of deposit.
So the Japanese resorted to political pressure offset by industrial strength. The US resorted to the machinery of the monetary press exclusively, during endless empty chatter about job growth and business creation, with little knowledge of how to accomplish either. While Japan had 0% stuck as policy with trade surplus, the US has 0% stuck with QE hyper monetary inflation dependence under the dark specter of monstrous annual deficits that tack on an extra $1.3 to $1.5 trillion each year. The American powerhouse, exaggerated in size due to hedonics, imputations, and debt paper shuffling, overridden by numerous $trillion frauds committed with impunity, also cannot move of the zero percent corner. Japan had no added weight from war costs. So the US debt burden is much greater, owing to the export of freedom and Orwellian principles on truth, coupled with fascist principles on aggression.
STIMULUS IS A RUSE, EXCEPT FOR SPECULATION
That 0% rate called stimulus is like calling bank aid a grand assist to the homeowners. It is like calling mortgage contracts protective of individual rights. It is like calling the Fannie Mae nationalization an exercise to continue the American Homeowner dream. It is like calling NAFTA the bond in worker alliances. It is like calling the Chinese low cost solution good for the cost structure and American consumer. It is like more of the parade of propaganda deceptions and lies, like Green Shoots of USEconomic expansion, Exit Strategy from 0%, and delayed QE3. The constant in US political economics is unspeakable deception and colossal ruin amidst chapters of mammoth frauds. The only stimulus from 0% is the continued leaning toward more Wall Street jobs and not factory jobs. Businesses struggle with oppressive federal regulations, poor domestic demand, rising costs, and a pool of unqualified potential workers. They borrow less and less as the months and quarters pass. Despite the favored leaning toward speculation in the financial sector, even investment banks are shedding jobs by the thousands. The nation has lost the concept of capitalism, business formation, capital creation, during a grotesque economic deterioration process in full bore swing. Laws are more directed toward confiscating wealth and forcibly sharing it than creating it, that is when not focused on efforts to censor information.
SYSTEMATIC DESTRUCTION OF CAPITAL
The fixture of 0% as monetary policy carries with it an admission that money is worthless. No directive by the flailing discredited US central bank could say it better. Money has no cost because it is not worth anything, being paper in basis and backed by no collateral. The deep storage gold does not count on the USDept Treasury balance sheets, a thin fig leaf to cover the absent genitalia of the once sturdy Uncle Sam. The 0% policy serves as a monkey wrench in the machinery. See the bank owned housing that cannot exit inventory status, encouraged by sub-4% mortgage rates. Imagine ultra-low mortgage rates that cannot bring about either clearance of inventory or a market recovery. The latest travesty is the upcoming dissolution of Fannie Mae itself. What miracle they might conjure up to make its rotten ramparts and acidic paper and corrupt core go away. Fannie will be buried at sea (of liquidity).
The cast of economists cannot comprehend the heavy cost of 0% in the widespread systematic destruction of capital. Take the small company whose costs are rising. It must close down the marginal elements of the business, and turn off the equipment, lay off the workers. The costs rise from the rising price of commodities, from metals to energy to lumber to cement, even executive lunches. The material costs rise from basic hyper monetary inflation, the ugly side to the unilateral USFed paper factory output. Business equipment, from computers to communications to widget makers to packaging devices, they are slowly turned off and retired. The essence of retired capital and its broad capital destruction is a foreign concept to economists. They still believe the USEconomy will enjoy the benefits of continued 0% stimulus. How wrong, how backwards, how tragic!! The 0% policy destroys capital and furthers the deterioration process. The gains to US exports are a drop in the bucket. The outsourcing continues apace, even with the dynamos Cisco Systems and General Electric.
A repeated message since so important. Focus on suppressed long-term interest rates and their damaging consequences. The US leaders boast of benefits from ultra-low interest rates. They believe that Americans are better off than the Europeans who are in shock from rising rates, a flash of reality during a debt crisis. Take the time to review some powerful consequences of interest rates kept low for years, in violation of permission to rise at least to the prevailing price inflation rate. Suppressing the 10-year bond yield has dire consequences. Some but not all of them appear unintended. The power centers want unlimited easy money for sure. But in doing so, they permit some horrendous developments like feeding a cancer.
1) Savers are given nothing in interest yield, slowing the economy with asset erosion
2) Banks are encouraged to continue holding their home inventory, which makes impossible any housing market clearance and recovery
3) Big banks will continue their USTreasury Bond carry trade schemes to replenish capital instead of business capital formation in partnership with the business sector
4) Investment banks are encouraged to continue their speculation and machinations, rather than to invest in factories, plant and equipment which would produce jobs
5) The USFed further expansion of its balance sheet to buy toxic assets instead of serving as a foster agent to the banking intermediary system
6) The USGovt is not discouraged from deficit reduction, since it believes it has unlimited time for remedy, thus assuring massive inflation, debt default, and systemic failure
7) The free money helps to conceal in vast turnover the toxic paper held under the USGovt roof, as in Fannie Mae, and other fraudulent mills such as MFGlobal lookalikes in the sovereign debt securities and their related derivatives.
ALTERNATE NEMESIS TO AUSTERITY
The Europeans are dealing with austerity measures in government budgets. The sovereign debt securities remain a constant problem, although in recent weeks the bond yields have come down to manageable levels, like below 6% in Italy and Spain. Few economists and bank analysts seems to realize that austerity plans put in place result in lower economic activity, more job cuts, fewer large scale projects, and thus higher deficits down the road. The austerity plans are Poison Pills, one and all, designed perhaps to enable installation of unelected Goldman Sachs technocrats in prime minister posts. The Greek situation is testimony, as budget cuts and massive amputations have resulted in worse fiscal deficits. So bring on more of the same!! The plague in the United States is of an opposite type. The budgets are unrestrained, notwithstanding the endless chatter in the USCongress and White House. War cost cuts will be resisted, my ongoing call. The Super Committee was a gross failure in full view, an aborted maneuver to install a Politburo but with a cleaner nameplate. The US financial theater does not urgently call on budget reduction, or eradication of waste, or fewer foreign embassies and air bases, or related prudence and discipline, in order to win creditor approval and to maintain integrity. The integrity is all lost while foreign creditors have jumped ship. Instead, the urgent calls within the hollowed (not hallowed) Untied States are for continued 0% policy in order to make the mammoth gargantuan debts and fraudulent toxic paper coverup more cost-free. What incredible opposites exist in Europe and the North America!! The US controls the global reserve currency, having turned its printing press into a well-oiled national shrine.
ULTIMATE JET ASSIST FOR GOLD
Back in 2003, the gold community made it well-known that the negative real rate of interest was the underlying jet asset kick starter ignition system for the Gold bull market. Take the baseline interest rate, subtract the baseline price inflation rate, and arrive a the real rate of interest. At 2% or 3% for long-term interest rates, at 8% or 10% for accurate honestly measured price inflation, the real rate of interest is calculated in the minus 5% to minus 7% range. Money is not only free for Wall Street speculators, it has negative cost to smart investors who devote their valuable funds to gold, silver, oil, metals, and other commodity resources, realizing full well that these hard assets will rise in value fast from the negative real cost of money. The USEconomy is mired in quicksand, not just mud. The mis-calculation of inflation in the adjustment to the Gross Domestic Product is also a travesty in sixth grade arithmetic. Take the nominal GDP to measure the economic size, subtract the true CPI as measured by the superb Shadow Govt Statistics gurus, and arrive at a chronic recession of minus 3% to minus 5% for four years running. That explains the absent job growth. Take the payroll tax withholding series to see the steady decline in national income, not easily masked.
GOLD & SILVER READY TO SOAR
Check out the obvious reversal pattern on the Gold chart in full view. It has a 200-point potential rise, which would take the Gold price to 1950. All solutions discussed are bogus and founded in funny money output, new debt, toxic bond redemption, and cost-free recapitalization of banks. No more liberated gold bullion like from Libya via mercenary wars on the horizon. Its 144 metric gold tonnes proved useful to the London and Wall Street Boyz. Syria aint got no gold to release. When the 1750 defended flank is overrun, the rise in the Gold price will be rapid. It will capture global attention again, enough to dismiss once more the vacuous shill self-serving nitwit calls for Gold’s demise.
Check out the obvious reversal pattern on the Silver chart in full view. It has a 7-point potential rise, which would take the Silver price to 42 per ounce. The large gap between 32 and 40 has been filled halfway, the next half to be filled in the following several weeks, possibly very quickly. When the 35 defended flank is overrun, the rise in the Silver price will be rapid, more rapid than Gold since the gap will offer little resistance. The rise will capture global attention again, enough to dismiss once more the vacuous shill self-serving nitwit calls for Silver’s demise and relegation to an industrial metal.
Jim Willie writes an investment newsletter. I have been a subscriber in the past and found it to be a very good investment tool. I am not getting compensated in any way to say this.
If you are interested in subscribing click on this link: http://www.GoldenJackass.com/subscribe.html
If you want to check out the free section of Goldenjackass.com click on this link: http://www.GoldenJackass.com
THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.
Few points to make. 1. The federal reserve bank propped up the banking system. This caused a slow crash instead of a fast crash. Either way they backed up their buddies and directed the course of history. 2. If the banks weren’t given loans they would have been insolvent and forced into bankruptcy. This would have been a domino effect that would have caused a lot of chaos. Gold would have went to the limit. 3. Because they bailed out the banks gold had a much more gradual rise (still historically significant).
There will be a crash. Bernanke directed an inflationary depression instead of a deflationary depression. Either way its still a depression. The difference is one is instant and the other is much more confined.
I have to disagree with the fed quote. The fed and the powers that put them into place are to blame because they created this fiasco in the first place. Without the fed in place we wouldn’t be on this roller coaster ride but instead slowly riding down lazy river. Banks wouldn’t have created bullshit financial products if they didn’t know they would be bailed out. Cause and effect.
wow, a frightening and enlightening read. i would be a little more comfortable with it, if there weren’t so many pieces of conjecture cited as fact. do we really know that fort knox is empty? did libya’s gold reserves really end up on wall street? where does the $108 billion number for mf global come from? i don’t disagree with the thesis of the article or that gold is the only safe haven. i just feel that the writing is somewhat overwrought.
Found the article very interesting; the response above not so much.
Anonymouse says the Fed is in a holding action creating a de facto Greenback. The problem is the Fed’s Greenback contains debt. The original Greenback issued by Lincoln was debt free. Big difference when building a “Web of Debt”.
Jim Willie writes the fixture of 0% as monetary policy carries with it an admission that (U.S.) money is worthless. What a great insight. The interest rate is the market value/price of currency/debt, just a wage rate is the value/price of labor. If the interest rate is 0%, the price of debt is zero and therefore the debt is worthless. Sooner or later, somebody’s going to realize value of future debt is an illusion and ask for their money back. It happened to Bear Stearns in Aug 2007. It’s what’s happening in the Euro zone today. It’s why derivatives, CDS’s, etc., pose such problems for the future.
Anonymouse’s three points are basically that continued devaluation of the currency is preferable to purging the system and restoring a sound currency. What nonsense. You can’t have a sound economy without a sound currency. For the last forty years the U.S. has devalued the currency and the result, as anonymouse says, is that the economy has beat a strategic retreat. Anonymouse says the retreat is due to free trade policies and automation. David Malpass, in a 2009 Wall Street Journal article (http://online.wsj.com/article/SB10001424052748703298004574458923186941870.html) says the “retreat” was due to a weak dollar, not globalization. That U.S. money and jobs went overseas not is search of cheap labor, but a strong, stable currency. Re-establishment of a sound currency, not continued devaluation, is the solution to America’s economic problems.
Anonymous notes that half of all Americans have no savings. One of the purposes of money is a store of value. If the interest is 0%, and inflation is anywhere from 3.5-11% depending on who you read, then money has a negative store of value and dollar savings are a poor choice as a storage of wealth. If the dollar Granny put into her savings in February 1971 was still worth 1/35th of an ounce of gold instead of the 1/1700+ an ounce of gold it’s worth today, she and other Americans might save a little more today. It’s the role of money in the savings system that failed, not Granny.
Finally, Short-sighted or Long-termed, Capitalism depends on Sound Capital. The Fed’s job is to maintain Sound Capital. It should be blamed for this failure.
I’ll take my chances with real hard assets than trying to guess what company’s has real assets, makes real profit and will survive the coming storm
What NY Times article???
Thanks again, Greg!!
As always you have supplied another credible and proven individuals perspective.
My perspective is a little bit cynical, but I am convinced TPTB are moving towards there end game. In order to bring about there NWO they must break western economies to the point of no return. Russian and Chinese citizens are already under control, the west is the last piece of the puzzle. They have all the banks insolvent, all Sovereign debt worthless, and soon all currencies worthless through hyperinflation as well. They approach this end cloaked in ignorance of the brainwashed masses…most will be totally unprepared.
Thank you again for all you do. Continue in the light, we need you!!
Otter, thanks for reading to the end, but I’m afraid you are all wet when stating that the function of money is a store of value. Not that that wouldn’t be a good thing — it’s just impossible to achieve. Values are not immutable and can’t be “fixed” in place; even gold has varied widely in value. Consider that in the late 1860s, the price of gold peaked at $160+ an ounce. In inflation-adjusted terms, that peak still stands. And today, after a ten-year run, gold has yet to achieve the level of its 1980 high. I’d say you’re better off in an index ETF, which is tied to the real economy, than in a speculative metal. History bears this out. Either way, precious metal or equities, you pays your money and you takes your chances.
Don’t forget Spain’s experience with gold in the 16th century: severe inflation, as well as social decay, after its conquest and looting of the New World. You say such an influx of precious metal can’t happen again? Aside from deep-sea troves yet to be discovered, I believe gold will someday be man-made, in a particle accelerator. (Has this already happened? If so, it wouldn’t be announced on the Nightly News. But we know that precious gems like rubies and sapphires aren’t so precious now that they can be made in a lab.)
Had Granny put a dollar’s worth of GE common stock under her bed in 1914, it not only would have retained its value over the years, it would have grown in value. Sorry, I can’t find the chart to quantify by how much it would have grown, but I’m certain its present-day value would exceed the present-day value of one-twentieth of an ounce of gold — the amount she could have bought with a dollar back then.
Likewise, for Treasuries compounded over 100 years.
Meanwhile, please explain how “debt” issued at 0% is truly “debt”? If you borrow at zero percent, you owe only the principal you borrowed, n’est-ce pas? With a devaluing currency, you actually owe LESS than you borrowed. There’s moral hazard here, of course — I’m just saying….
If it were possible to fund the world’s currency needs with hard metal (actually impossible since there are only a few grams of gold per capita worldwide), there would be hoarding, defacing of coinage (remember “pieces of eight”), etc., since the medium itself would have value. So, there’s still the problem for the payee of assuring the value of the specie he’s paid in. With the fiat dollar, it’s WYSIWYG. If, on the other hand, paper were issued with gold backing, there’s the problem of assuring the gold is really there, and that policymakers don’t change the ratio of paper to metal to suit political exigencies.
At the end of the day, Sound Capital does not depend on a “sound” currency so much as it depends on sound leadership — that’s where we have failed. The fault lies not in our institutions, but in the people controlling them. And, ultimately, that is us.
A nicely written, content-free Jeremiad. Thanks for that. Here’s another way to look at the Mess: the Fed is engaged in a holding action with its no-interest policy (which, btw, creates a sort of de facto Greenback — exactly what anti-Fed populists see as the solution to our “web of debt.”)
Point One — The economy being saddled with trillions of dollars of failed loans, the Fed could: (1) follow the author’s advice and let the system purge itself (Herbert Hoover would approve), or (2) “eat” the bad loans itself. Bernanke, being an expert on the Great Depression, chose the latter course. This has the effect of perpetuating (propping up) the banking system, which obviously is what the Fed is supposed to do. The Fed is unique among institutions in being able to do this, since it can create the money to buy the bad paper and sit on the stuff as long as necessary without consequence (except for the devaluing effect on our currency, which is seen as preferable to a Greater Depression).
Point Two — The Fed is obligated to maintain a market for Treasuries. Its printing presses are all that allow the federal gov’t to run trillion-plus deficits without severe consequences to the US taxpayer. Without QE, interest rates would rise very significantly, and the consequences of this would be: US gov’t default on its debt (and/or much higher taxes), more loan failures, falling home prices, and a stronger dollar (killing our nascent manufacturing recovery). Again, devaluing the currency seems preferable.
Point Three: Since half of all Americans have no savings, and the savings of the middle class, for the most part, are tied up in home equity, the low or no-interest policy harms most the monied class. Imagine that!
As I said, The Fed’s fighting a holding action against the tide of history. The US economy has been beating a strategic retreat since the ’70s, due to: (1) free trade policies which have shifted jobs overseas to our detriment (but boy that cheap crap at Walmart sure is great); and (2)automation, which is affecting workers everywhere (even in China).
To digress, the dream of Short-sighted Capitalism is an environment in which it’s all gravy — no competition, no regulation, the least-possible number of wage slaves, the least-possible capital investment, and captive demand. Thanks to the governing effect of money on politics, Short-sighted Capitalism is ever closer to getting what it wants. Of course, there’s not much room for most of us regular folks in this brave new world, except as “useless eaters,” so many of us may have “to go” just to balance the equation between consumer demand and resource availability. (But, hey, that’s what war is for.)
At any rate, to blame the Fed for the Mess we’re in is like Hitler’s blaming Rommel for the cock-up on the Western Front. (Sorry, I’m not nearly as adept at punchy, content-free metaphor as Mr Willie.)
But, yeah, buy precious metals if you like. Just be aware, “They” can and probably will make you an offer you can’t refuse for the stuff, just like Roosevelt did in 1934. Alternatively, you could use your brain and search for investments that perform well in an inflationary world. There are excellent books on the Weimar experience. Check out Ferguson’s “When Money Dies,” and/or “The Economics of Inflation: A Study of Currency Depreciation” by Costan Bresciani-Turroni. And if you’ve gotten this far, congratulations: you have an open mind.