Technically that dollar in your pocket, a Federal Reserve Note, was debased this week.
Most people don't realize that the dollar is a unit of measure. There are dollars, and then there are those pieces of paper you may have called Federal Reserve Notes. They are IOUs from a private bank called the Federal Reserve. They are usually backed, or collateralized, by 100% US guaranteed debt, Treasuries and select agencies like Ginnie Mae (and not pseudo-guaranteed agencies like Fannie and Freddie).
Did we just witness an historic first this week? Did the Federal Reserve Note just get debased by about fourteen percent? Is a portion of the Federal Reserve Note now backed by the private and illiquid obligations of Wall Street?
Here is an excerpt from the Fed's Balance Sheet that comes out in the H.41 report every Thursday after the markets close.
Only 86% of Federal Reserve notes, rightfully IOUs from the Fed or Federal Reserve Notes, are still backed by AAA debt obligations.
There was quite a flash bang around Bear Stearns, the dollar and the metals this week. While we were distracted did Ben just cross the Rubicon by backing the FRN 'dollar' with junk? Treasuries are still Treasuries. Agencies are still agencies. But this ain't your daddy's dollar anymore. And certainly not your granddaddy's. We've taken a step almost as great as the loss of gold backing for the US dollar in circulation. Now it is not even backed by 100% AAA debt.
Welcome to interesting times.
“Thus, it should be understood that when pro-US figures use the term, 'rules-based international order,' they are not referring to anything analogous to the rule of law. Quite the opposite, they are using Orwellian language to describe a system in which essentially no rules can be established and/or observed, given that the dominant state has the prerogative to violate and/or rewrite “rules” at its whim.” Aaron Good, American Exception