US Treasuries and gold have waged a silent fight for dominance in investors’ flight to safety over the past 22 months. Gold has been suppressed over that period by manipulation by the President’s “Working Group on Financial Markets,” via the US Treasury and the privately owned Federal Reserve. In spite of this ongoing intervention into what are supposed to be free markets gold has held its own.

Since the beginning of the year when the 10-year Treasury note yielded 2.35% it has steadily lost ground. It recently rose to 3.36% and is currently at 3.27%. That is a lot of ground lost in spite of manipulation of that market by the Federal Reserve. The Fed’s efforts have been hindered by an enormous amount of debt issued by the Treasury in order to meet funding operations as well as to assist in funding commercial banks’ balance sheets. This is our Treasury taking funds from responsible Americans to finance and subsidize those in the financial world who turned our financial system into a vast gambling casino. In the process the Treasury and the Fed have crowed out commercial investment, which has led our economy into depression. You cannot have recovery without investment. When history studies what has gone on over the past 22 months it will be aghast that those who created the problem have been designated to fix it. These are the greedy, corrupt destroyers of capital that are about to serve us up hyperinflation as part of a cure to gain time in a senseless effort to save the unsavable, our financial system. A system that teeters on the edge of insolvency. Not only have shareholders and bondholders been wiped out, but so have depositors. If you are patient you will see what we mean. This charade cannot go on indefinitely. Sooner or later Murphy’s Law will come into play. That untoward event that no one expects takes place. The money has already been spent and the only way to continue is to issue more money and credit. That issuance currently is about 18% and climbing, and as a result daily the US dollar loses ground to other currencies and to gold. The sale of Treasury securities are absorbing domestic and foreign savings so much so that the Treasury has the Fed buying its bonds, notes and bills directly from the Treasury and from out of the market, along with collateralized debt obligations. The problem with that is that the Fed with limited assets has to create money and credit to do this, and in this process monetize the debt, which is very inflationary immediately.

Then there is another $900 billion to purchase CDOs, collateralized mortgage obligations, better known as toxic waste. These are also purchased by creating money out of thin air. When the Fed purchases these CDOs they are removed from the sellers’ balance sheets and replaced with cash. That cash is then deposited with the Fed and now earns interest. It sits there sterilized until used. When it is eventually used it is very inflationary. On the other hand rather than keep the money on deposit the banks can use the funds to buy Treasuries, which becomes immediately inflationary. The bottom line is the Treasury meets its deficit with manufactured money, the banks improve their balance sheets and the Fed’s balance sheet looks like a garbage pit.

What this means is that either way any recovery is at risk because the absorption of government debt will push interest rates higher, monetary velocity will increase and hyperinflation will ensue. That unfortunately is underway as we write. The die is cast and again as in 2002 there is no turning back. The point of no return has past. There can only be one reason for this unsound monetary policy and that is the financial companies have to be bailed out at any cost and the public must foot the bill. The only time we know of that this has been attempted on this scale was in the Weimar Republic and we all know what happened in that experiment. Trillions of dollars of investment are being crowed out of the market stopping any recovery. There is no chance as well that excess liquidity will be withdrawn from the system. If it is withdrawn deflation will overwhelm inflation and collapse will ensue. As a result of monetization the liquidity is already in the system. When more liquidity is needed the exercise has to be done over and over again, unless sufficient savings are available. Even at 4.2% of GDP that is not nearly enough. The economy hasn’t improved one bit in the last 22 months and we see nothing that tells us that this is going to change for the better.

Once it starts there is no end to the demands. The National League of Cities has asked the US Treasury for a $5 billion interest free loan to capitalize a new municipal bond insurer it plans to create. This would be the first publicly owned US financial guarantor. Fascism marches on. It would be bigger than MBIA $3.8 billion and $11 billion of current market leader Assured Guaranty. The new entity would only insure general obligation and revenue bonds. It would insure $168 billion over five years. This will be another failed enterprise for government, which is hopelessly inept. They just don’t get it.

The G-7 admit to recession, corporate earnings continue to fall, we see minus growth of perhaps 4% into the end of the year, industrial production has fallen quickly and deeply as has trade, unemployment mounts monthly and excess capacity plagues every nation. Some economists see minus 8% or 10% by yearend. Growth stops as federal debt rises.

All of the above were exacerbated by cessation of interbank lending. No one trusted anyone any more. Due to lying by banks and others regarding their balance sheets banks stopped lending, which brought commerce to a standstill. That eventually was solved by the Federal Reserve guaranteeing everyone’s lending, not only in the US, but worldwide – particularly in Europe. How else could 3-month Libor rates have fallen from 4-5/8% to 0.75%?

Making the underlying problems worse American fiscal debt has risen from $368 billion to an estimated $2 to $2.5 trillion for fiscal 2009 ended 9/30/09, as revenues plunge. This is further complicated by the severity of the recession, which began in February of 2007 and in February 2009 graduated into depression. No one but us is willing to admit that, but that is really the way it is. All the comparisons with 1931, 1973, 1981, 1991 and 2001 do not do the current depression its due. It can more easily be compared to the early 1870s, the madness encountered after the Civil War.

As we know the Federal Reserve Act of 1913 was legislated into being as the solution to recessions, panics and depressions. As you can see they have been emminately unsuccessful. That is why we champion the passage of Rep. Ron Paul’s B ill HR 1207, the Federal Reserve Transparency Act of 2009 - a Bill with 179 co-sponsors. The Bill would cause a congressional Audit of the privately owned Fed, which we believe would lead to its demise and with its functions being returned to the US Treasury, which our Constitution provided for.

We are in today’s horrible situation because the Fed encouraged, as a matter of policy, that banks use 40 to 60 times leverage in lending instead of the historically sound ratio of 8 to 10 to one. For each dollar on deposit 8 or 10 could be prudently lent out. Due to the economy at the time subprime real estate loans were encouraged, where borrowers were ill suited for loans. The result was a real estate bubble followed by collapse. This is solely the responsibility of the banks and the Fed. This is a story of excess leverage and greed.

          The magnitude of the recession was underscored by the latest numbers from the U.S. Treasury: last month’s individual income tax receipts dropped 44% and corporate tax revenue plunged 65% compared to April 2008. Alarming news, as April is historically the biggest collection month of the year and usually results in a sizable budget surplus for the month.  

          Every “green job” created with government money in Spain over the last eight years came at the cost of 2.2 regular jobs, and only one in 10 of the newly created green jobs became a permanent job, says a new study released this month. The study draws parallels with the green jobs programs of the Obama administration.   

          President Obama, in fact, has used Spain’s green initiative as a blueprint for how the United States should use federal funds to stimulate the economy. Obama's economic stimulus package, which Congress passed in February, allocates billions of dollars to the green jobs industry. 

          But the author of the study, Dr. Gabriel Calzada, an economics professor at Juan Carlos University in Madrid, said the United States should expect results similar to those in Spain: 

          "Spain’s experience (cited by President Obama as a model) reveals with high confidence, by two different methods, that the U.S. should expect a loss of at least 2.2 jobs on average, or about 9 jobs lost for every 4 created, to which we have to add those jobs that non-subsidized investments with the same resources would have created,” wrote Calzada in his report: Study of the Effects on Employment of Public Aid to Renewable Energy Sources.

          Obama repeatedly has said that the United States should look to Spain as an example of a country that has successfully applied federal money to green initiatives in order to stimulate its economy.

          “Think of what’s happening in countries like Spain, Germany and Japan, where they’re making real investments in renewable energy,” said Obama while lobbying Congress, in January to pass the American Recovery and Reinvestment Act. “They’re surging ahead of us, poised to take the lead in these new industries.”

          A Wall Street brokerage firm collected $6.2 million in illegal fees by duping hundreds of investors into buying stocks at inflated prices, a prosecutor said Wednesday.

          An indictment charged the two founders and 15 former employees of the now-defunct Joseph Stevens & Co. Inc. with enterprise corruption, grand larceny and other felony counts. They were to be arraigned later Wednesday in state Supreme Court in Manhattan.

          About 800 people were victimized by the scheme involving 5,000 trades between 2001 and 2005 that totaled $151.3 million, District Attorney Robert Morgenthau said at a news conference. Many of the victims were retirees, doctors and other professionals who lost much of their life savings, he said.

          Prosecutors allege brokers would commit to buying a large block of shares at a discount, then wait until the stock ticked up in value before buying it for clients at the higher price.

          "The brokers never told their customers that their primary reason for recommending the stock was to earn additional undisclosed compensation, rather than because of the quality of the investment," Morgenthau said.

          Many times, the investments took a dive in the weeks or months following the fraudulent trades. The district attorney said because of the heavy loses, some elderly investors "were forced back into the work force to survive."

          If convicted, the defendants face up to 25 years in prison. The names of their attorneys were not immediately available.

...

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-- Posted Monday, 25 May 2009 | Digg This Article