Flimflam II: The Federal Reserve Plans Another Con Job!


Treasury Securities are simply the Federal Government getting a loan from whoever wants to give them money for a nominal return but guaranteed safety.  When the government borrows money from China or Saudi Arabia or Japan the IOU that we give them is a Treasury Security stating when we have to pay them back and how much interest we will pay at that time. You and I sign a promissory note when we borrow money stating when and with how much interest we agree to pay back the funds borrowed.  The big thing that recommends Treasuries to investors is that the money is backed by the government of the most dynamic economy on earth; the United States.  To get such security and a bit of interest people have been willing to buy Treasury Securities because the security, the absence of risk, is very attractive in a volatile and changing economic milieu. Treasuries equal the USA and that means safety for your money.


When the Obama Administration plans extravagant spending, for a stimulus that won’t work, they plan to borrow the money by issuing Treasury Securities, to countries like China, who are increasingly uneasy about financing any more American Debt.  It’s as if you owe the $5000 limit on your Visa card and economic conditions deteriorated and you needed to borrow more money so you call up Visa and say that you need your credit limit expanded to $10,000 and that would take care of the problem.  VISA is willing to go along with that because you’ve been a good customer in the past and they think you’re good for the money.  They like the idea of having you on the hook for $10,000 so they’re happy to make the increase and loan the money.  Three months go by and you call up VISA and say that you need your limit expanded to $30,000 and that would get you through the rough patch and guarantee that VISA gets paid and all is well.  VISA is not so enthusiastic this time but after meetings and endless forms and investigation they agree to increase your credit but they want a bit more interest and some security like a lien on your home.  (Or a claim on your children’s future economic viability)  Six months later you call up VISA and tell them that you need your credit limit raised to $300,000.00 in order to avoid default. This time VISA doesn’t want to make the loan because it’s no longer sure you’re good for the money.  You assure them that it’s either this massive increase in your credit and you ride the storm together or a default in which Visa loses all the money its loaned you to date.  VISA cuts you off and decides you’re no longer credit worthy and writes you off as a bad loan.  That’s the Real World for you and me but not for Uncle Sam.


The staggering sums of money involved in the international economic debacle is so huge that a default by the USA will send the entire planet into an economic depression, if not an economic Armageddon that no one wants to face.  Our creditors don’t like it but they’re hooked: either they continue to lend to us or everyone goes down the drain including them.  So they give us trillions more from their people and their recourses to finance Nancy Pelosi’s hundreds of millions in contraceptive planning and hundreds of millions more to prepare the American people for universal health care.  There’s the old saying that if you get 10,000 from the banker you can’t sleep nights but if you get $100,000 then the banker can’t sleep nights.  Our national creditors are already at that point and discussions are underway in Europe about how to revamp the world banking and economic systems to remove dependency on the United States of America.  Our creditors have had enough and are looking franticly for an exit strategy because the day is coming when Washington will offer Treasury’s and the world won’t buy them.  That will be a hard day in America.  It will introduce generations of suffering from our economic addiction to spending and delusions about us and our national needs.


Now the latest idea to come down the pike as in the article below from Bloomberg is to have the Federal Reserve System, which is neither a reserve, nor federal, (But a consortium of foreign banks that finance our government) to buy government debt along with China and Japan in the hopes of getting a better deal for the Treasury.  Specifically our creditors want more interest for buying our debt but the Fed will be bidding in competition trying to buy for less interest in the hope of shaping the market in favor of the Treasury Department. The Feds competition for our national debt instruments, Treasury Securities, will influence the auction in beneficial ways for the Treasury.  How do you think that makes our creditors feel? 


China is supposed to buy more and more American Debt but the Federal Reserve is interfering to force the debt to be bought at terms outrageously in favor of the debtor!  Even though nothing in American policy has merited anything other than more interest to cover the increasing risk of these once safe securities by trickery the terms have been artificially turned in favor of the debtor. Not only is America demanding more money but its introducing a gimmick, a false player on the field in order to get lower interest rates on more outrageous borrowing!  Its as if you called up VISA and said that you want your credit limit tripled and your interest rate cut to 2% or you default and let the bankruptcy judge pay them 3 cents on the dollar.  The Federal Reserve wants to jump into the Treasury Securities Field and shaft all the people who’ve been financing our orgy of spending by cheating them out of the greater interest they should get for our risky policies!  How much more is necessary before the world tells the United States of America what to do with those treasury securities?


The United State as we know it today can’t exist without massive amounts of our debt being bought by foreign governments.  This is what we’ve been reduced too and now we have the Fed trying a transparent con like this one!  Bernie Madoff would be proud of Ben Bernanke and even of Tim Geitner, the Treasury Secretary of the Obama Administration. 


We’ve got the wrong policy being administered by the wrong people, for the wrong reasons.  When our national economic life is indistinguishable from a ponzi scheme peddled to the unwary by a bunko artist, it’s time to face the music and take our medicine.  Like a Ponzi scheme the economic engine is largely out of anyone’s control now and its just a question of how much longer it can survive and what will be left of America in its aftermath.


Consider these clips from Bloomberg and read the whole story at the following URL: http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ0bwWpcnFaM&refer=home



Fed policy makers meeting tomorrow and the day after are exploring the purchase of longer-dated Treasury securities in an effort to push up their price and bring down their yield. Behind the potential move: a desire to reduce long-term borrowing costs at a time when the Fed can’t lower short-term interest rates any further because they are effectively at zero.

The risk is that central bankers will end up distorting the Treasury market, triggering wild swings in prices — and long-term interest rates — as investors react to what they say and do. “It sets forth a speculative dynamic that is very unstable,” says William Poole, former president of the Federal Reserve Bank of St. Louis and now a senior fellow at the Cato Institute in Washington.

The Treasury market has “some bubble characteristics,” Bill Gross, the manager of Newport Beach, California-based Pacific Investment Management Co.’s $132 billion Total Return Fund, said in December on Bloomberg Television. He echoed that sentiment last week.

“I will say, and I have said for the past three months, the governments are very overvalued,” Gross said in a Jan. 20 interview. Treasuries last year returned 14 percent, according to Merrill Lynch & Co.’s Treasury Master Index, their best performance since 1995.

Inflated Prices

Recent history shows the economic danger of inflating asset prices. After a stock-market bubble burst in 2000, the Fed slashed interest rates to as low as 1 percent and in the process helped inflate the housing market. The collapse of that bubble is what eventually helped drive the U.S. into the current recession, the worst in a generation.

Faced with the danger of a deflationary decline in output, prices and wages, the Fed is considering steps to revive the moribund economy. On the table besides bond purchases: firming up a pledge to keep short-term interest rates low for an extended period and adopting some type of inflation target to underscore the Fed’s determination to avoid deflation.

The central bank has been buying long-term Treasury debt off and on for years as part of its day-to-day management of reserves in the banking system. Yet it has always gone out of its way to avoid influencing prices. What it’s discussing now, says former Fed Governor Laurence Meyer, is deliberately trying to push long rates below where they otherwise might be.


Poole, who was then at the St. Louis Fed, was critical at the time of what he called the central bank’s “miscommunication.” He now sees the Fed making the same mistake with its latest suggestions that it might buy longer- dated securities.

“If they do it, it’s going to be disruptive to the market,” says Poole, who is a contributor to Bloomberg News. “If they don’t do it, it will impair the Fed’s credibility and erode the confidence the market has in the statements that the Fed makes.”

Meyer, now vice chairman of St. Louis-based Macroeconomic Advisers, says the Fed should, and probably will, go ahead with purchases as a way to lower borrowing costs. “The story is stop talking and start buying,” he says.

Still, he notes that not everyone at the Fed is enthusiastic about the idea. One concern: Foreign central banks and sovereign-wealth funds, which are big holders of Treasuries, might cool to buying many more if they believe prices are artificially high.

Undermine the Dollar

That may undermine the dollar. “There’s no guarantee that international investors would switch to other dollar- denominated debt if flushed from the Treasury market,” says Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. in New York, says foreign investors might also get spooked if they conclude that the Fed is monetizing the government’s debt — in effect, printing money — by buying Treasuries.

Bernanke himself, in his 2003 speech, said monetization of the debt risked faster inflation — something bond investors, foreign or domestic, wouldn’t like.

Some economists argue the Fed would help the economy more if it bought other types of debt. Even after their recent rise, 10-year Treasury yields are still well below the 4.02 percent level at the start of last year.


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