"We're Going To Kill The Dollar" - The Fed's Plan B

[Adele Edisen]

"We're Going to Kill the Dollar"
The Fed's Plan B
By Mike Whitney

This is the Fed's plan: Bail out the banks, transfer the banks bad bets onto its
own balance sheet, hammer the greenback, slash wages (via inflation), boost exports,
and pump as much money as possible
into the unproductive, overbuilt black hole we call the US housing market.
http://www.informationclearinghouse.info...e33685.htm [http://r20.rs6.net/tn.jsp?e=001Jt00wDlKF...LxgkObaMAJ


"We're Going to Kill the Dollar"
The Fed's Plan B
By Mike Whitney

January 22, 2013 "Information Clearing House" - "How do you solve a problem when you're running a 10% fiscal budget deficit? You are not going to get growth without private sector credit demand. The government's idea right now is that we're going to export our way out of this, and when I asked a senior member of the Obama administration last week how are we going to grow exports if we will not allow nominal wage deflation? He said, "We're going to kill the dollar." Kyle Bass interview.

Last week, amid growing rumors of a global currency war, the Fed's balance sheet broke the $3 trillion-mark for the first time in history. According to blogger Sober Look: "For the first time since this program was launched (QE) it is starting to have a material impact on bank reserves … which spiked last week. 2013 will look quite different from last year. The monetary base will be expanded dramatically as long as the current securities purchases program is in place. Money printing" is in now full swing.'" ("Fed's balance sheet grows above $3 trillion, finally impacting the monetary base", Sober Look)

Take a minute and consider the implications of the Fed's money printing operations in relation to the above quote by market analyst Kyle Bass. Can you see what's happening?

The Fed is acting exactly as one would expect it to act given it's stated intention to increase inflation (currency debasement) while intensifying the class war at the same time.

How is the Fed waging class war, you ask?

Fed chairman Bernanke has been a big supporter of deficit reduction, which is code for slashing public spending. The recent "fiscal cliff" settlement raises taxes immediately on working people by ending the payroll tax holiday. As Bloomberg notes: "Everybody took a two percentage-point pay cut." This is bound to impact consumer spending and confidence which dropped sharply last week. Here's more from Bloomberg:

"Payroll taxes went up. As part of its budget agreement on Jan. 1, Congress agreed to let the tax, used to pay for Social Security benefits, return to its 2010 level of 6.2 percent from 4.2 percent. That reduces the paycheck by about $83 a month for someone who earns $50,000." (Bloomberg)

So all the worker bees (you and me) have less money to spend, which means that there's going to be less activity, higher unemployment and slower growth. This is what all the liberal economists have been warning about for over 3 years, that is, if the government withdraws its fiscal support for the economy by reducing the budget deficits too soon, the economy will slip back into recession.

So what is the Fed doing to counter this slide and to create the illusion that nutcases who preached "austerity is good" were right?

Well, the Fed is buying mortgage-backed securities, right? So the Fed is actually dabbling in fiscal policy, assuming a role that is supposed to be played by the Congress. Now, I realise that the buying of MBS doesn't precisely fit the definition of fiscal policy because the Fed doesn't collect taxes and redistribute the revenue. But it sure doesn't fit the description of monetary policy either, now does it? The Fed is not setting rates to control the flow of credit into the system. No, the Fed is buying stuff; financial assets that provide credit to loan applicants who are purchasing hard assets. That ain't monetary policy, my friend. It is fiscal policy writ large.

The Fed is currently purchasing $45 bil per month in US Treasuries to push down long-term interest rates in order to help the banks sell more mortgages so they can reduce their stockpile of distressed homes.

And, the Fed is buying $40 billion of MBS per month to help the banks clear their books of left-over MBS and to provide funding for the banks to generate new mortgages.

Also, 95% of all new mortgages are financed through Fannie and Freddie. In other words, the government is providing all the money and taking all the risk, while all the profits go to Wall Street.

Let's review:

Fannie and Freddie's policy is designed to help the banks
The Fed's MBS purchasing program is designed to help the banks.
The Fed's QE (UST purchases) policy is designed to help the banks.

Do you see a pattern here? It's all for the banks, which is why Marx was correct when he referred to "political economy" because the economy doesn't operate according to free market principals. It is organized in a way that best achieves the objectives of the constituency that controls the levers of political power.

Now guess which constituency controls those levels of political power presently?

If you guessed "the Wall Street banks", give yourself a pat on the back.

So, what effect is this going to have on policy?

Well, to some extent we already know the answer to that question becauseas we pointed out earlierthe policy is shaped to benefit the banks. Even so, an analogy may be helpful to better grasp what's going on.

Let's say you have $5 million that you want to put into manufacturing. In fact, you have decided you want to open your own factory and produce widgets of one kind or another to sell to the public. Eventually, you whittle your options down to two choices; you will either produce a modern line of electric cars to reduce emissions and pave the way for new technologies or you will make hula hoops. So, what's it going to be?

Fortunately, for you, the Fed announces a new program that will provide $45 billion per month "indefinitely" to manufacturers who provide low interest loans to people who want to buy hula hoops.

"Yipee", you say. "I will abandon my plan to save the planet from poisonous greenhouse gases and make my fortune selling hula hoop bonds to the Fed instead."

Isn't this what's happening? None of this has anything to do with lowering unemployment, strengthening the recovery or increasing growth. It's all just a way of funneling money to powerful constituents. And one thing is certain, that if the Fed creates the demand for a product (like MBS), then someone is going to fill that demand whether it helps the broader economy or not.

But if the Fed can buy mortgage bonds, then why can't they buy infrastructure bonds? What's the difference?

The difference is that mortgage bonds boost profits for bankers, whereas infrastructure bonds merely provide jobs for people who need them. In other words, the difference is not between fiscal and monetary, but between the "haves" and the "have nots", which is the same as saying that the Fed's policies are based on class interests. And, that brings back to our original comment by Kyle Bass, who wonders how the US can grow its way out of its present predicament (big budget deficits and weak exports) without more "private sector credit demand"?

Great question. But you can see that Fed chairman Bernanke has already tipped his hand. The Fed is going to keep waving that "$45 billion per month" carrot in front of the banks until they rev-up the credit flywheel and create a new regime of toxic mortgages. (The new Consumer Financial Protection Bureau's rule on "Qualified Mortgage", which requires neither a down payment nor credit scores, makes this prospect even more likely.) Bernanke is playing the role that the repo market played before the Crash of '08, that is, the Fed is promising to buy all the complex bonds (MBS) the banks produce off balance sheet to keep money flowing to the banks. It's just like the free market, except there's nothing free about it. It's all fake and Bernanke doesn't care if you know it.

$45 billion per month isn't chump change. It's enough to inflate housing prices, to employ more out-of-work construction workers, to grow the economy, and to save bank balance sheets that are deep in the red. At the same time, the Fed's ballooning balance sheet will put downward pressure on the dollar which will increase exports while lowering real-inflation adjusted wages. Like the man said, "We're going to kill the dollar."

This is the Fed's plan: Bail out the banks, transfer the banks bad bets onto its own balance sheet, hammer the greenback, slash wages (via inflation), boost exports, and pump as much money as possible into the unproductive, overbuilt black hole we call the US housing market.

Of course, President Obama could avoid all this nonsense and just launch a government-funded jobs program that would snap the economy out of its coma, increase demand, and turbo-charge GDP, but that would be way too easy. And probably bad for profits, too.

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

This article was originally posted at Counterpunch

Adele

[Jan Klimkowski]

But if the Fed can buy mortgage bonds, then why can't they buy infrastructure bonds? What's the difference?

The difference is that mortgage bonds boost profits for bankers, whereas infrastructure bonds merely provide jobs for people who need them. In other words, the difference is not between fiscal and monetary, but between the "haves" and the "have nots", which is the same as saying that the Fed's policies are based on class interests. And, that brings back to our original comment by Kyle Bass, who wonders how the US can grow its way out of its present predicament (big budget deficits and weak exports) without more "private sector credit demand"?

Great question. But you can see that Fed chairman Bernanke has already tipped his hand. The Fed is going to keep waving that "$45 billion per month" carrot in front of the banks until they rev-up the credit flywheel and create a new regime of toxic mortgages. (The new Consumer Financial Protection Bureau's rule on "Qualified Mortgage", which requires neither a down payment nor credit scores, makes this prospect even more likely.) Bernanke is playing the role that the repo market played before the Crash of '08, that is, the Fed is promising to buy all the complex bonds (MBS) the banks produce off balance sheet to keep money flowing to the banks. It's just like the free market, except there's nothing free about it. It's all fake and Bernanke doesn't care if you know it.

$45 billion per month isn't chump change. It's enough to inflate housing prices, to employ more out-of-work construction workers, to grow the economy, and to save bank balance sheets that are deep in the red. At the same time, the Fed's ballooning balance sheet will put downward pressure on the dollar which will increase exports while lowering real-inflation adjusted wages. Like the man said, "We're going to kill the dollar."

This is the Fed's plan: Bail out the banks, transfer the banks bad bets onto its own balance sheet, hammer the greenback, slash wages (via inflation), boost exports, and pump as much money as possible into the unproductive, overbuilt black hole we call the US housing market.

Of course, President Obama could avoid all this nonsense and just launch a government-funded jobs program that would snap the economy out of its coma, increase demand, and turbo-charge GDP, but that would be way too easy. And probably bad for profits, too.

Yup. Mike Whitney outlines a highly likely scenario and its rationale.

Of course you won't usually hear this from BBC or CBS or Fox or Bloomberg economic correspondents.

Back in 2001, I made a BBC film called "The Great Dot.Con" which exposed the internet pump and dump Wall Street/City of London scam, featuring interviews with insider whistleblowers and thieving analysts. The programme boss bollocked me off for daring to make an investigative film which took a hostile editorial line towards crooked investment bank behaviour.

That was the last film I made for that particular, and particularly asinine, part of the BBC....

[Adele Edisen]

What Would a Trillion-dollar Coin Mean?

Stephen Zarlenga.
Director, American Monetary Institute

Posted: 01/23/2013 5:09 pm (Originally posted on the Huffington Post - AE)

The idea that the government should issue a trillion-dollar platinum coin arose during debates to avoid raising the debt limit in 2011. The "debt" limit has been a congressional charade for decades. Congress set a debt ceiling and has raised it again and again. However, the United States economy relies on government deficit spending to operate and to prevent recessions and depressions. This was established as policy during the Great Depression.

The emergence of the trillion=dollar coin idea is encouraging in that it recognizes that the federal government has the sovereign power to create its own money. This is a major constitutional power, giving We, the People the authority to issue our own money. U.S. Constitution Art. I, Sec. 8, Clause 5, "The Congress shall have Power... To coin Money and regulate the Value thereof,..."(i). As leading constitutional scholar Robert G. Natelson demonstrated in his lengthy article in the Harvard Journal of Law and Public Policy on the meaning of "to coin" in the Article 1, Section 8, Clause 5, the word "coin" here is a verb, meaning to create or originate: "... the money thus "coined" did not need to be metallic. Paper or any other material that Congress selected would suffice. Because the power to coin paper was express, it requires no justification by the incidental powers doctrine of the Necessary and Proper Clause."

Most of the money we use today is digital, and nearly all of this money is presently created by the private banking system when they make loans. The U.S. Treasury, under the direction of Congress and the president, could create money in any amount the same way. The Federal Reserve Banks would be required under current law to accept that money on account.

The advantages of this sovereign power are several. The federal government could go far beyond merely avoiding a debt limit and could operate without deficit. It could pay off all existing debt, thus eliminating hundreds of billions of dollars of interest payments each year. This would free up revenue to provide desired and necessary services, creating millions of useful economy stimulating jobs -- all debt free. This would include repair of degraded infrastructure, universal medical care, and universal education. The federal government could bail out states, many of which are deeply in trouble; and help resolve their pension problems. Again, all of this could be accomplished debt free.

A publicly issued trillion-dollar coin would help us break our political and economic chains of banking corporations supplying our nation's money supply as interest bearing debt. Considering the destruction the banks have wrought, shouldn't our nation revisit the foolish policy of giving banks the license to create our nation's money, then having our government borrowing that money and paying interest on it?

What the trillion dollar coin has to offer is illuminating our constitutional money power, and Congress's malfeasance in allowing banks to create the national money supply as interest bearing debt. This can be important in helping people understand that the monetary power belongs with the United States government to promote the general welfare, not with the caprice of private bankers acting to promote their own corrupt interests.

A trillion-dollar coin could avoid raising the debt limit, but it does not solve most of the problems facing our monetary and banking system. It leaves the same corrupt financial power structure in place. Bank issued debt used for money in our system remains in place -- that is the source of current economic stress. It does nothing to reduce the interest burden of the existing federal and state debt. It does nothing about private debt such as housing, consumer, and student debt. It does nothing to get 47 million people off food stamps. It would not repair infrastructure or provide employment.

A trillion-dollar coin would not prevent the continuing inflation and deflation of bank credit called business cycles. It would not retard the growth of private debt and mis-distribution of wealth from lower and middle income people to the rich. Wealth would continue to be concentrated more and more into the upper one tenth of one per cent of the population.

In short, a trillion-dollar coin does not remedy the anti-American effects of the monetary power being concentrated in the financial sector. It merely undercuts one political party's ability to close down our government over a nonsense issue.

The real solution to those problems was introduced into the 112th Congress by Congressman Dennis Kucinich, HR 2990. This bill puts the private Federal Reserve System under the U.S. Treasury, so that money creation in the U.S. becomes a function of government. The accounting privilege banks presently have to create money in the form of debt is ended by ending what is known as the fractional reserve system. New money is introduced into the economy by approved congressional government spending for infrastructure, health care and education.

The experience of history strongly supports all these measures, as is made clear in the "frequently asked questions" assembled by the American Monetary Institute and viewable here at our website.

Notes:

i. United States Code, Title 31


By Stephen Zarlenga, and AMI researchers: Robert Poteat of Onalaska, Washington; Jamie Walton of Washington, DC; and Greg Coleridge of Cleveland, Ohio. Originally edited by Patrick Notaro.

Stephen Zarlenga is director of the American Monetary Institute and author of The Lost Science of Money. Meet him in Chicago at the 9th Annual AMI Monetary Reform Conference!

This Blogger's Books from

The Lost Science of Money: The Mythology of Money, The Story of Power
by Stephen A. Zarlenga

Follow Stephen Zarlenga on Twitter: http://www.twitter.com/AMImonetary


Adele

[Adele Edisen]

But if the Fed can buy mortgage bonds, then why can't they buy infrastructure bonds? What's the difference?

The difference is that mortgage bonds boost profits for bankers, whereas infrastructure bonds merely provide jobs for people who need them. In other words, the difference is not between fiscal and monetary, but between the "haves" and the "have nots", which is the same as saying that the Fed's policies are based on class interests. And, that brings back to our original comment by Kyle Bass, who wonders how the US can grow its way out of its present predicament (big budget deficits and weak exports) without more "private sector credit demand"?

Great question. But you can see that Fed chairman Bernanke has already tipped his hand. The Fed is going to keep waving that "$45 billion per month" carrot in front of the banks until they rev-up the credit flywheel and create a new regime of toxic mortgages. (The new Consumer Financial Protection Bureau's rule on "Qualified Mortgage", which requires neither a down payment nor credit scores, makes this prospect even more likely.) Bernanke is playing the role that the repo market played before the Crash of '08, that is, the Fed is promising to buy all the complex bonds (MBS) the banks produce off balance sheet to keep money flowing to the banks. It's just like the free market, except there's nothing free about it. It's all fake and Bernanke doesn't care if you know it.

$45 billion per month isn't chump change. It's enough to inflate housing prices, to employ more out-of-work construction workers, to grow the economy, and to save bank balance sheets that are deep in the red. At the same time, the Fed's ballooning balance sheet will put downward pressure on the dollar which will increase exports while lowering real-inflation adjusted wages. Like the man said, "We're going to kill the dollar."

This is the Fed's plan: Bail out the banks, transfer the banks bad bets onto its own balance sheet, hammer the greenback, slash wages (via inflation), boost exports, and pump as much money as possible into the unproductive, overbuilt black hole we call the US housing market.

Of course, President Obama could avoid all this nonsense and just launch a government-funded jobs program that would snap the economy out of its coma, increase demand, and turbo-charge GDP, but that would be way too easy. And probably bad for profits, too.

Yup. Mike Whitney outlines a highly likely scenario and its rationale.

Of course you won't usually hear this from BBC or CBS or Fox or Bloomberg economic correspondents.

Back in 2001, I made a BBC film called "The Great Dot.Con" which exposed the internet pump and dump Wall Street/City of London scam, featuring interviews with insider whistleblowers and thieving analysts. The programme boss bollocked me off for daring to make an investigative film which took a hostile editorial line towards crooked investment bank behaviour.

That was the last film I made for that particular, and particularly asinine, part of the BBC....

Jan,

Is that film, "The Great Dot.Con", still available somewhere? Do you have a copy? If you do, could you put it on YouTube.com? I would love to see it.

Adele

[Lauren Johnson]

How do you do it? Usually devaluing a currency means driving up another currency, which means big money players are not willing to hold assets in dollars. Which currency will be more attractive to convert trillions in dollars into other currencies? Which country has capital markets robust enough to provide the means to convert to that currency?

More specifically, will big players be more comfortable with their assets in Euros? The Pound?

The dollar will be the preferred currency as long as the Empire is maintained.

[Jan Klimkowski]

[
Jan,

Is that film, "The Great Dot.Con", still available somewhere? Do you have a copy? If you do, could you put it on YouTube.com? I would love to see it.

Adele

Adele - I have a copy on VHS, and don't currently have a VCR player.

One of the problems of working in the industry back then was that you only got poor quality copies of your films. I have many documentaries that I directed that I need to get off VHS and onto some modern format.

Thank you for asking.
Jan

[Jan Klimkowski]

Here's a contemporary Daily Telegraph review from 2001 of the BBC film "The Great Dot Con", which I produced and directed:

Our interview with the "analyst" at Salomon Smith Barney was terminated by SSB's press goon, and we were thrown out. They tried to seize our rushes, but I refused and got out of the building with my camera crew and reporter at top speed.

The great dot con and the Wall St whistleblower

12:00AM GMT 11 Mar 2001

TOM BROWN does not look like a crusader. In his plush office 34 floors above the New York traffic he looks every inch the Wall Street banker. And for 21 years Brown worked for a succession of Wall Street brokers and banks, becoming one of the most highly regarded equity analysts in his sector, paid more than $1m a year.

Now Brown is on a crusade to expose the innermost workings of Wall Street, which he believes played a crucial role in creating the internet share boom and subsequent bust. "It really was Wall Street at its worst," says Brown.

The dotcom share bubble on both sides of the Atlantic was fuelled by repeated "buy" recommendations from the analysts at the leading investment banks. Their "target prices" for internet shares suggested multi-billion pound valuations for small, new companies.

In America, the leading internet analysts became media celebrities. Their recommendations were eagerly reported in newspapers and on business television channels such as CNBC and Bloomberg. Their enthusiastic support helped provide legitimacy for share prices which, for example, valued Amazon.com, the loss-making internet bookseller, at more than $30bn.

Traditionally, the role of the analyst is to provide independent opinions for investors. But just how independent was the advice investors were getting during the internet boom? According to Brown, the business of advising investors has become less and less important for the major investment banks. The big profits come from helping corporate clients with share flotations and mergers.

Interviewed for the BBC2's The Money Programme, Brown calls it "the industry's dirty little secret". Many analysts, he argues, are not driven by a desire to help investors make money with their investment opinions, they are trying to help their investment bankers win lucrative banking business.

"The highest-paid Wall Street analysts are the ones that are most helpful to their investment bankers," he claims. And the potential rewards are enormous - $1m a year is common. The top analysts can collect $15m in pay and bonuses.

The response of the investment banks is to point out that where they have a banking relationship with a company which their research analyst is writing about they disclose it (albeit in small print). But, according to Brown, that misses the point. Deal-hungry bankers regard every company as a potential client and don't want their analysts to be critical of any company except the most obvious basket cases.

Independent research indicates that analysts are overwhelmingly positive about the companies they follow. Monitoring of US analysts' recommendations by First Call reveals that at the peak of the internet share boom 72 per cent of recommendations were to "buy" shares, 27 per cent were to "hold", and less than 1 per cent were "sell".

Even now, in a very different economic climate, only 1.2 per cent of recommendations are "sells" or "strong sells". Analysts point out that "hold" is often a coded signal meaning "I don't like the look of this", but it is a code that many private investors do not understand.

Research by The Money Programme reveals that not only were the internet analysts at the big investment banks hugely optimistic as the dotcom bubble formed, they also continued to pump out bullish circulars as the bubble burst.

Take Tim Albright, e-commerce analyst at Salomon Smith Barney. Last June he was recommending Amazon as a "buy" at $52 with a target price of $130, which would value the business at about $45bn. Rather a lot you might think for a business which at the time would not even forecast when it might start making a profit.

As the shares plummeted, Albright kept recommending Amazon as a "buy". Only in January, when the share price was under $15 did he downgrade his recommendation to "outperform". It is now $12.25.

So what does Albright say now about last year's recommendations? He concedes they were based on "optimistic assumptions" and points out that "one of the challenges of being an analyst is that often you make a call with less than complete evidence".

Another of Albright's recommendations last summer was Priceline.com, the online retailer that invites customers to name their own price for goods and services. Last June he recommended Priceline at $38, with a target price of $130, which would value the business at $21bn.

One of the people who bought into the excitement about Priceline.com was Donald Demar, a 71-year-old retired shop owner who was trying to build up a legacy for his six grandchildren. He invested heavily in the company last summer. He did not specifically follow the recommendation of Albright or the other leading analysts who were recommending Priceline, but Wall Street's enthusiasm for the company found its way into the newspapers and television programmes which he follows daily. "I believed it was a bubble that would never burst," observes Demar.

But the Priceline bubble did burst. As the shares dipped below $10 in October Albright downgraded his recommendation to "neutral". They are now below $3. Demar's investment of $350,000 is now worth about $20,000.

Albright's response is that "businesses with extremely high valuations are inherently fraught with risk". He denies that for analysts such as himself there is any conflict of interest between the desire to win new corporate clients for the bank and the desire to give investors independent advice. He sees his job as creating "a franchise" with investment clients. "Ultimately you can't build a franchise if you are overly compromised."

Investment banks like to point out that there are Chinese walls between the deal-making investment bankers and the analysts in the research department. Brown laughs at the idea. "There is no wall between investment banking and research," he says.

The solution, he says, is to separate the two businesses completely. "We're going to have to go back to where the investment analysts are separated from the investment bankers to truly give unbiased advice to the investing public". He believes that regulators on both sides of the Atlantic need to look hard at the role of the investment banks during the internet share boom.

It was certainly a lucrative period for the big investment banks. The business of managing high-tech share issues was dominated by five investment banks: Goldman Sachs, Morgan Stanley, Credit Suisse First Boston, Merrill Lynch and Salomon Smith Barney. According to research by Thomson Financial these five managed $117bn worth of high-tech share issues last year, which would have yielded some $7bn in fees.

The rewards of investment banking are huge, but Brown has turned his back on them. He was fired by his last employer because his "negative opinions" about companies he covered were considered damaging to the investment banking part of the business. But Brown has returned to the financial markets and is managing his own hedge fund.

Brown describes leaving his work as an investment analyst as the best thing that ever happened to him. And his advice for investors? Take recommendations from analysts with two grains of salt.