The Big Lie

A week ago the Federal Reserve announced an open-ended plan to purchase mortgage-backed securities (MBS) to the tune of $40 billion per month until the Fed is satisfied with the unemployment situation.  In some circles this is being called QE Infinity.  This should raise eyebrows everywhere as this is a backdoor bailout for those institutions carrying MBS on their books.  If the Fed is buying MBS from whom are they buying them? What does the purchase actually accomplish?

Primarily, large financial and lending institutions would be selling MBS to the Fed.  This includes Fannie and Freddie MAC, financial institutions such as Bank of America, Goldman Sachs, Citi Group, and JP Morgan.  The Fed’s purchases are another bailout as risky assets are transferred from the balance sheets of financial institutions to the Fed’s balance sheet.  The purchase socializes the risk of these assets because the people are now liable for them as they are now on the Fed’s balance sheet.  If this playbook seems familiar that’s because it was done in 2008 and 2009 through TARP.  The rewards are privatized and the risks are socialized.  Once again financial institutions continue to gamble money and when things go wrong the losses are transferred to the public.  There is no longer any concept of moral hazard as the Fed is back stopping everything.

Secondly, how does the Fed actually buy MBS?  They print money.  Actually, it is really the creation of electronic deposits as the financial institutions receive credits in their account as a result of the sale.  The purchases expand the base money supply as money is created out of thin air to purchase MBS.  More base money chasing the same supply of goods and services results in inflation.  Since Nov 2008 the base money supply has quadrupled from roughly $800 billion to nearly $3 trillion.  Now that Ben Bernanke has become the 4 trillion dollar man, expect inflation to accelerate.

Furthermore, the Fed has been engaged in a program called Operation Twist.  This program has been in place for nearly two years.  The program is designed to swap long-term bonds (10 and 30 year bonds) with shorter duration bonds (2, 3, 5, and 7 year bonds).  The good news is this doesn’t introduce new money into the money supply.  But it does require the Fed to purchase longer term bonds and then turn around and sell shorter term bonds with the goal of netting this out to zero.

But this is not a zero sum game.  First, the Fed has been buying all the long-term bonds for the past couple of years.  There aren’t other buyers.  Moreover, there isn’t much long-term debt remaining to be purchased as most of it has already been swapped with shorter duration bonds.  This means a substantial amount of short-term debt is coming due in the next two to seven years.  Though interest rates on short-term bonds are near zero the payments, including interest, will come due requiring more bond sales.  What happens if nobody shows up to the auction?

Today, the Fed is taking down nearly 60% of all the bond auctions.  The primary dealers (i.e. Goldman Sachs, JP Morgan, etc.) taking down a significant portion of the remaining 40%.  The primary dealers then engage in a “repo” transaction with the Fed where the bond is given to the Fed and cash flows to the primary dealers.  In turn, the primary dealers use this money for their own proprietary trading desks which make investments in financial products such as derivatives, mortgage-backed securities, credit default swaps, hedge funds, collateralized debt obligations,  etc.  Often these positions conflict with those of the financial institutions clients.  This happened during the housing bubble when financial institutions were shorting positions they were otherwise selling on the open markets to other investors.  And, when things go wrong, there is no moral hazard.  Again, the financial institutions privatize the rewards and the risks (i.e. losses) are socialized through program like TARP, and the open-ended Fed MBS purchase program.

The primary reason the Fed is monetizing assets such as mortgage-backed securities is because it has already bought up most, if not all, of the longer term bonds.  The illiquidity in the long-term bond market reduces the Feds ability to buy longer term bonds and replace them with short-term bond sales.

Consequently, it is the people who pay the price as there is more debt, higher inflation, and less purchasing power in the currency.  This all leads to the big lie.

The government is hiding the fact that the government is insolvent.  Bankrupt.  Government officials and the central planners at the Federal Reserve all know the system is insolvent.  To keep the system going the Fed needs U.S. credit market debt to double roughly every eight years (average time to double over the past 40 years).  GDP growth is driven primarily by consumerism.   The economy is 70% consumer spending rather than the production of real goods desired by others.  The consumer takes on debt as they go on vacation, buy homes they can’t afford, new cars, etc.  Government encourages this behavior because they understand that GDP growth is tied to consumer spending which in turn is driven by the credit market.  This chart, courtesy of Chris Martenson, illustrates credit market debt growth over the past 40 years.  What the chart shows is that the credit market is no longer expanding but moving sideways.

The central planners are hoping that people feel richer because of the Feds actions.  That people will begin to buy things on credit to expand the total outstanding credit market debt.  But this hasn’t happened over the past four years and the Fed’s latest move is one of desperation.  The Fed needs to create another bubble to drive up consumer credit demand.

Ultimately, buyers of short-term debt will begin to dry up as well.  The Fed, acting as buyer of last resort, will monetize all debt until the currency is destroyed all in the name of “saving the economy” or “trying to keep down unemployment”.   Every country in the history of mankind that has destroyed their currency has imploded, collapsed.  If the definition of insanity is doing the same thing over and over expecting different results, then the DC’vers and the central planners are insane.

The Zerohedge website provided the following tidbit from the Romney 47% speech.  Notice how this hasn’t been reported on:

“Romney:  [The] former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve.  And I met with him, and he said as soon as the Fed stops buying all the debt that we’re issuing – which they’ve been doing, the Fed’s buying like three-quarters of the debt that America issues.  He said, once that’s over, he said we’re going to have a failed Treasury auction, interest rates are going to have to go up.  We’re living in this borrowed fantasy world, where the government keeps on borrowing money.  You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion?  The Chinese aren’t loaning us anymore.  The Russians aren’t loaning it to us anymore.  So who’s giving us the trillion?  And the answer is we’re just making it up.  The Federal Reserve is just taking it and saying, “Here, we’re giving it.”  It’s just made up money, and this does not augur well for our economic future.  You know, some of these things are complex enough it’s not easy for people to understand, but your point of saying, bankruptcy usually concentrates the mind.”

In this speech Romney acknowledges the problem and explains what the Fed is doing.

But, the big lie is that government – including the current administration, the Federal Reserve, and even a Romney administration — refuse to address the problem.  They are all tied up in a self-created Gordian Knot.  There is not a single politician that would bring down the system on their watch.  Instead, it will be drawn out over a period of time until the entire system collapses.

So, the DC’vers use mystical words like sterilization, quantitative easing, and Operation Twist to hide the fact that they are simply printing money out of thin air.  They are destroying wealth and purchasing power in the process.   That means they are destroying the economy and our lives while protecting the system from collapse.

This is the big lie.  It is the granddaddy of lies.  The lie is so big and the consequences so immense our elected officials can’t even bring themselves to discuss it openly with the people.  Likewise, the people are presented with the facts cannot break free of their normalcy bias and recognize what is transpiring in front of them.

The greatest threat to most people is not some terrorist in the Middle East.  It is not a fellow traveller getting on an airplane.  The greatest threat resides in a ten square mile area called Washington D.C.  The DC’vers and the central planners at the Federal Reserve are our greatest threat.   Ironically, the Federal Reserve building happens to be located on Constitution Avenue.

There is nothing noble, honorable, truthful, or moral in what they are doing.  They are dishonest, ignoble, immoral, and unethical because they perpetrate the lie.  Undoubtedly, it is the people that will bear the burden of their depravity.   It is a heavy price to pay just to “get my guy” into office.

You can argue over the importance of tax rates, energy policy, and environmental overreach.  You can argue whether an Obama or Romney presidency will be better or worse in those regards.  It is irrelevant.  It is all a moot point until the issues with the monetary system and the currency are resolved.  People are focused on the crumbs on the floor while the entire house is crumbling around them.