Gold Daily and Silver Weekly Charts - FOMC Next Week - Policy Error of the First Order - YTD Returns

Both the FOMC and the BoJ will be meeting next week, and the markets will be watching what they say and do with keen interest.

As you may recall, the Bank of Japan is now overtly monetizing the debt of Japan, having bought something like 90 percent of their bonds. What makes it monetization rather than money printing is the fact that the bonds are at least passing through a semblance of a public market on their way from the Treasury to the Central Bank. What makes it monetization is the size of the purchases and the non-market rates paid by the Bank.

In this sense, in addition to the BoJ, the Fed is also monetizing debt, as well as the ECB. They have been emboldened in that so far this has not produced any seriously disruptive consequences, although consequences there most certainly are.

The manner in which this is done and the proceeds distributed in a series of speculative asset bubbles that transfer wealth from the stimulus of aggregate demand to acquisitive rent-seeking makes it a policy error of the first order.

As for the FOMC meeting next week, they are faced with wishing to raise rates, for what I believe are their own policy purposes, in an economy that appears to be slipping into recession. That the Western financial Illuminati may wish to blame Europe and Asia for their economic troubles is another matter.

The US will be reporting much more economic news next week which may provide more clarity on the state of the economy.

Gold is having an unusually large month for delivery action on the Comex. And as for silver, although this is a quiet month, silver bullion continues leaking out of the warehouses. If you take a look at the numbers you can see why some think that JPM has almost cornered the market on free silver bullion at least in the NY markets.

Lets see if gold and silver can break out here. If so, then I think we can provide some reasonable estimates of the upsides.

Have a pleasant weekend.

Modern Monetary Theory: The Sophistry of the US Dollar

soph·is·try (s f -str ). n. pl. soph·is·tries. 1. Plausible but fallacious argumentation. 2. A plausible but misleading or fallacious argument.

This is a very well written and important piece by Mr. Cullen Roche at his site Pragmatic Capitalism.   It does a good job of capturing the essence of modern monetary theory that I like to think of as post-Nixonian fiat, gaining its realization and fruition in Reaganomics and the Greenspan Fed.

Sophistry does not refer to the author or his argument who I assume believes exactly what he is saying, and of which reasonable people can make what they will.  And he is certainly not alone in his thinking.  More recently thought leaders have said the very same thing, and sometimes couched as an attack on anything else to stand up to the value-is-whatever-we-say-it-is crew of central planners and their financial engineers. 

I have done him the courtesy of including the entire piece with a link, with my comments in italics along the way.  I dislike it when someone 'cherry picks' something I have written, setting up a silly strawman argument and a false premise, and then attacking it often in a clumsy manner.  And I think this argument of Mr. Roche is well said, and worth considering seriously.  He might be right. 

But I do not think so.  I think his reason jumps the tracks at a key juncture and runs into the weeds thereafter. I fear this is a system that requires an exponentially greater reach of control and misdirection to keep working as in a late stage ponzi scheme.  And that is what makes it especially dangerous, because it must at some point silence all dissent, and promote its provisions and arrangements amongst the unwilling, or fail.

So as I said, he does a very good job of explaining it well, and many intelligent and people with weighty credentials and position seem to agree.  But many of these same people also said they ardently believed in the efficient market theory and the benefits of deregulation, and we see how quickly that belief system has collapsed under the weight of the financial crisis, although its remnant echoes are continually reappearing in various places and policies.  Old ideas die more slowly than old soldiers, especially when they continue to enrich a powerful status quo.

Rather, the sophistry is in the evolving nature of US dollar and its role as the world's reserve currency, and too often the discussions that surround it.   Perhaps rationalization would be a better word, but sophistry captures the intent of it I think.

As you may recall, the basis for the unilateral departure of the US from the Bretton Woods regime and the gold standard under Nixon was that the full faith and credit of the US Treasury, with an independent Fed as guardian of the realm, would force the Dollar to act as though it were still externally constrained, as in the case of a gold standard.   As Greenspan said, the dollar works as long as it acts as though it were on a gold standard.

This is why, as I recall, the Fed is prohibited by statute and custom from buying debt directly from the Treasury.  It must first pass through the public markets at auction, in the belief that market discipline will prevent excess money creation by legitimate price discovery and higher interest rates as required.

It might be useful to consider at this time a different definition for monetization, that is not the archaic 'printing of money.'  Monetization might best be described as those actions which consciously misprice the decreasing value and prospects of money, normally a currency, and by corollary the associated risk and returns.  As you can see this includes the debasement of specie money through various means, but also the more modern method of egregiously tinkering with interest rates beyond merely policy rate adjustments.

As I have pointed out previously, to circumvent market discipline merely requires a Fed with the will to do it, and a few complicit primary dealer banks to play along with it.  This can work well as long as no one with sufficient sovereign standing calls them on it, or the people who are the users of the currency rise up en masse against it.  This is convenient arrangement amongst regulators and market fixers is merely an impasse, and is not sustainable in a floating exchange rate system.  The arrangement requires ever increasing duplicity and threat of force. After these many years, the dollar is now literally hanging on to its value with its reserve currency nails.

And so I think a collapse of the dollar is more possible now than at any time in the past.  It is only sustained by the trauma which the decline of such a large economy would cause on the world markets and those central banks unfortunate enough to hold its debt.  This is the best case one can make to explain a hyperinflation

Pragmatic Capitalism
The Fed Is Not Monetizing U.S. Government Debt
By Cullen Roche
February 9, 2011

The Fed’s purchases of Treasuries continue to attract a huge amount of attention. Despite solid evidence that the program is failing to have any real fundamental economic impact, there are other worries about the program. None has been more apparent in recent weeks than the Fed’s supposed monetization of the US government’s debt. These fears of monetization are unfounded due to the various myths that are perpetually touted by the mainstream media, supposed experts on the US monetary system and even Fed officials. (Quite a collection of the mistaken, certainly not the hoi polloi and not so easily dismissed, but let's read on.  I have to add though that flags get raised in my mind whenever I pick up this tone in an argument early on. - Jesse)

In an article Monday, Bloomberg reported that the Fed has been buying an exorbitant proportion of the recently issued Treasury debt:

More than 40 percent of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20 percent in December and 15 percent in November, according to Bank of America Merrill Lynch. The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers’ holdings of Treasuries to the lowest since November 2009.

Why does this matter? Because it gives the appearance that the US government is directly funding itself via the Fed’s purchases. This would be nefarious if it were true and would give credence to the endless complaints about the high rate of inflation in the USA (which is currently running at a staggering 1.5%-2.25% depending on the source). Fortunately, the concerns are unfounded.  (Unfortunately they are not, but read on. - Jesse)

The issuance of bonds continues to this day due to Congressional mandate. In reality, our bond market funds nothing and serves only as a reserve drain which helps the Fed maintain its overnight target interest rate. It has nothing to do with funding the government.  (It would be interesting to test this theory.  For example, if the US were to have a failed bond auction this year. - Jesse)  When the US government wants to spend money they do not call China and ask for a line of credit. They do not count tax receipts. And they most certainly do not call the Fed to ensure that we have any money left. No, the truth is that the USA never really has nor doesn’t have any money. So the entire implication that the Fed is helping to fund US government expenditures is entirely inaccurate and anyone who implies as much is still working under the now defunct gold standard model and clearly doesn’t understand the workings of the modern monetary system. 

(This is the heart of the sophistry.  For the theory as it stood for many years was that market discipline and an independent Fed would take the place of the gold standard in placing some constraint on the value of the bond and the dollar.   Otherwise why would the Treasury simply not create the bonds to satisfy its obligations and place them on the Fed's balance sheet?  Or better yet, just issue currency and skip the interest?  Because the theory is that by using interest rates as a governing mechanism and forces the debt to be placed through an open system of auction, the efficiency in valuation of the market would act as a standard and as a restraint. - Jesse)

When the US government was working under the gold standard the US Treasury would literally print up certificates to purchase gold from the gold mines. These gold bars would be delivered to the government and the Treasury would issue a check to the miner. This new money would end up at the Federal Reserve Bank in the form of deposits. This would naturally increase the money supply. An increase in the money supply is scary for obvious reasons. So, the term debt monetization has its origins in the days of the gold standard, but persists to this day despite the fact that we are no longer on a gold standard. Not surprisingly, the term is still used today despite the fact that the US government can’t monetize its debt via Fed purchases (I elaborate below). 

(This description of the gold standard is regrettably cartoon-like, and completely ignores the role it played as a market force in international trade.  Most of the gold volume was related to the exchange of goods in trade, and not through the purchase of new supply from miners.  In a situation where a nation consumed more than it produced, the decline of its gold holdings would weaken its currency, forcing a unit devaluation vis a vis gold.  And vice versa with those countries with a mercantilist bent.  Since actual gold was changing hands, and a relatively modest increase is added each year to total supply, it was difficult to game the system.  Monetary policy in the form of devaluation was still very possible, but a bit awkward if one used actual specie instead of certificates. But it was enforceable and transparent. I am on the record as not favoring a return to the gold standard in the US at this time, because its financial system is too unstable and corrupted.  But gold and silver represent a major attraction for international trade in some manner, for the reasons outlined above.  The US dollar was purported to serve this purpose as the world's reserve currency post 1971, but it has failed in the exact manner predicted by those who said it could not work because of the vagaries of human weakness and the corruptibility of policy. - Jesse)

This issue was magnified yesterday when Richard Fisher of the Dallas Fed invoked the evil “debt monetization” term in his speech:

The FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June. By this action, we have run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise. There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: “Monetary policy responsibility cannot substitute for government irresponsibility.”

The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases. I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation. And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream. I am a veteran of the Carter administration and know how easily prices can spin out of control and how cruelly markets can exact their revenge. I would not want to relive that experience.”

Fisher’s implication is that the Fed is directly helping to fund the US government’s spending. After all, if they’re buying the debt then they’re obviously funding the spending, right? Wrong. As regular readers know, the US government is never constrained in its ability to spend. Our monetary system underwent a dramatic change when Richard Nixon closed the gold window. It removed any constraint on the US government’s ability to spend. Nonetheless, the operating structure of the gold standard (issuing bonds, etc) still largely remained intact.

(The constraint is softer, and more pernicious than when the US was on a gold standard. The constraint is now the external valuation of the bond in the generic sense, and the dollar, which is a bond of zero duration. During the Carter administration, for example, the dollar was constrained by monetary inflation, the decreasing valuation placed on the bond and dollar by the rest of the world. A gold standard acts as a hard restraint, stopping the monetary authority from debasing the currency early on. Without that constraint perception make the process non-linear. Rather than a hard stop, with a transparent and visible devaluation process, the value can erode slowly over time until it reaches a tipping point, and a more precipitous slide into a collapse. The Fed is confident they can stop this based on the Volcker experience. This remains to be seen. They have no prove of it in theory because it involves human behaviour and significant, if not critical, international exogenous variables. - Jesse)

For a brief instant, Mr. Fisher appears as though he is on the verge of understanding the system he now heavily influences as a new voting member of the FOMC. Mr. Fisher says that the spending effectively comes first:

But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place….The Fed does not create government debt; Congress does.

Lights should be going off in Mr. Fisher’s head at this point as he says this. This is important because Mr. Fisher is essentially acknowledging that the Fed is not the entity that actually conducts helicopter drops. Of course, spending comes before debt issuance. It can be no other way in a monetary system such as ours. The Fed’s role in this process is purely monetary. It has nothing to do with the fiscal side. The Fed does not “print money”. Congress is the entity that prints money via deficit spending.  (And the Fed is supposedly the independent constraint on this, and of course the printing of money that occurs in the private banks and the shadow banking system. - Jesse)  And they always decide how much to spend before considering any potential constraint from taxes or bond issuance. Unlike a household or state the US government does not need money before it spends. (The Fed is the only relatively unrestrained source, as well as being the regulator, the governor if you will.  Because the US must issue a bond at some point to cover its spending. This is not a mere detail.  It is a rhetorical device to argue the timing, for it is implicit in the process of governance..  But only the Fed can expand its balance sheet ex nihilo, from nothing.  - Jesse)  From a common sense perspective, you would think that this would set alarms off in most people’s heads, however, it does not. The idea that the US government is never revenue constrained is so foreign to most people that their minds repel it. (And rightfully so, since such an outlook is a tenet of the Robert Mugabe School of Business, University of Zimbabwe - Jesse)

By now you might be thinking that this is all semantics. Who cares if the Fed isn’t helping to fund the spending? They’re still buying the bonds and the spending is occurring regardless of the Fed’s actions. Well, it’s important for several reasons:

1.  Someone who understands the modern monetary system understands that a sovereign government with monopoly supply of currency in a floating exchange rate system has no solvency issue. Therefore, it should not be treated as if it is a household, business or state. (This sounds as though it could be  the motto of the Weimar school of modern monetary economics.  What is missing is that for this to be correct that monopoly must be comprehensive, ie, there must be some force that cause the misallocation of wealth in the world from a central planning commission, and a mispricing of risk.  In other words, its necessary to be the world's reserve currency and to own the ratings agencies. Otherwise the only floating that gets done is the value of a currency printed ad infinitum down the drain.  The value of a fiat currency is tenuously based on the belief that the monetary authority will not assume it has no solvency issue because it owns a printing press and is willing to use it recklessly, that the currency retains some stable relationship to some useful goods.- Jesse).

2.  If solvency is not a concern (and here reason departs from reality, especially given the many serious instances of high inflation experienced by countries not on a gold standard since the end of World War II.  Technically Russia was not insolvent when the Soviet Empire collapsed. It merely re-issued a 'new ruble' after knocking a few zeros off the old one.  Tell the good news to those whose life savings were destroyed. - Jesse)  then clearly the concern is inflation or potential hyperinflation. But as we’ve seen over the last few years the Fed has not succeeded at creating inflation anywhere close to the historical average and certainly not dangerously high levels of inflation. To someone who understands how the modern monetary system functions it not surprising then, that the Fed has been unable to generate inflation during a balance sheet recession. (Inflation is how one measures it.  I would submit that the Fed is quite expert at generating asset inflation in things like financial assets and housing, having done it quite well a few times now.  But I would agree that this is not sustainable, for the reasons noted by Jefferson so many years ago, that this printed money is used for merely speculative as in gambling, not adding the 'mass' of the economy but merely serving as a subtle means of wealth transferal.  For fiat money is not wealth, but merely the means of allocation and transference. - Jesse)

3.  Fear mongerers want you to believe that the Fed is the evil entity that “prints money”. The truth is that the Fed can do no such thing. Only Congress can print money and it’s clear that their actions in recent years have failed to generate significant inflation. This is a sign that the government’s spending has been ineffective and misguided. Although I acknowledge that the US Congress is never constrained in its ability to spend this by no means implies that the US Congress should spend beyond its means. To do so can possibly result in malinvestment or very high inflation.  (As a general rule of thumb, name calling, also known as poisoning the well of a counter argument, often introduces and highlights the weakest points in a discussion. Having said that, in a fiat system the interest rates are a key bellwether and governing mechanism to the money supply and the expansion of credit which is the source of money. To this extent to say that the Fed is not involved is to use the same defense that the Wall Street banks used in the subprime mortgage crisis.  They did not originate the loan. They merely bundled them, helped to misprice them, and then sold them to the unsuspecting, the marks in this great con game. - Jesse)

4.  The idea that the Fed is buying government debt might imply that there are is a shortage of buyers of US debt. This is impossible as government debt issuance serves only as a reserve drain. Auctions are designed around calculated reserves and are carefully designed so as not to fail.  (There are a shortage of buyers at certain prices, so the Fed steps in to buy them in the act of mispricing of risk. - Jesse)

5.  Voting members of the FOMC do not understand the actual workings of the Federal Reserve System and the US monetary system and have played a direct role in the misguided policy response in recent years. Of course, this is nothing new. This problem has persisted throughout the entirety of the last 40 years and is largely to blame for the structural flaws in the US economy currently. (If those voting members included Greenspan and Bernanke and I would most heartily agree, but I do not think that is what Mr. Roche intends. - Jesse)

6.  The overwhelming majority of US citizens have no idea how the US monetary system actually functions and therefore are reluctant or unable to force any sort of real change. (As I recall those same citizens rose up almost en masse and besieged their Congressmen to vote against TARP.  They were ignored by the Congress which has been inundated by money from the banking lobby. The desire for change is clearly there.  What is lacking is choice, and I think it is fraud with intent. - Jesse) Those with political or monetary motivations tend to invoke fearful language that incites anger and in truth only adds to the problems in the US economy by driving the voter base to react to their emotions and not their knowledge of the system in which they reside.

7.  Quantitative easing does not increase the money supply and is therefore not inflationary. (Apparently the Adjusted Monetary Base escapes his attention, in addition to the Fed's role as 'the standard in proxy' acting in lieu of an external standard such as gold or a peg to a hard currency - Jesse) Although this operation can have significant psychological impacts (such as inducing undue speculation)  (You bet your ass it does, and it is doing it right now - Jesse) QE can only work in the same manner that traditional monetary policy is implemented at the short-end of the curve. This occurs by setting a target rate and by being a willing buyer of any size at that rate. This is NOT how the current policy is designed. The current structure of QE leaves interest rates entirely controlled by the marketplace and not the Fed. Therefore, the mixed results should come as no surprise to anyone as the policy was poorly designed to begin with and is likely doing little more than contributing to excessive speculation and promoting the continued financialization of the US economy. The Fed’s implementation of such policies (such as QE) and complete misunderstanding of such policies does nothing but help create disequilibrium in the marketplace and increase the odds of future instability. (What Mr. Roche seems to be saying is that the Fed should just set rates across the curve, and chuck the marketplace.  Now THAT's bare-knuckled monetization.  It might work if the Fed could also set a price for oil, food, gold and silver, and make that stick for example.  They are trying with gold, and silver with less success, but not even that much for the others. - Jesse)

8.  Monetization is achieved by act of Congress via deficit spending and is independent of the Fed’s monetary policy. Anyone who uses the term in the context of the Fed’s contribution of government spending does not understand how the modern monetary system works. In a strict technical sense, monetization is always

(This ignores the role of private banks in creating credit which becomes money. Certainly the Congress plays a key role in the creation of money through government spending and the issuance of debt. But the private banking system plays a key role as well. And the gatekeeper for all this is the Fed.   This also ignores the Fed's new ability to buy purely private debt and mortgage obligations. Indeed, as I recall in those distant days when there was a misplaced fear that with its illusory surplus the Fed might run out of sovereign debt to buy, the Fed reassured us that it could buy debt from many other sources. They can do it, and they are doing it. - Jesse)

End Note: It is disappointing to find that these types of discussions too quickly devolve into name calling and sloganeering for one's team, to little benefit except for page clicks and crowd persuasion, which faux reasoning seems to drive too much of the financial reporting today.

Indeed, there seems to be little actual investigative reporting in general being done anymore in the states. And we are seeing far too little reasoning being done from those quarters from which we might expect better. It is too often talking head versus talking head in the staged manner of professional wrestling.  And conspicuous in this deficiency is the economics profession, which too often become a pliable mouthpiece for this or that well-heeled constituency. But it is as one might suppose it to be. There is nothing so corrosive to intellectual integrity as the cover up of a well-intentioned but artificial and inherently deceptive scheme gone badly, and one is caught in a credibility trap.  And of course a status quo based on position and privilege always has its allures.

Many people have raised a voice about the frauds at the center of the financial collapse, and we are at the point where this type of discussion does not matter overmuch; people are going to believe what they wish to believe based on self-interest and the principle of relativism and expediency. Chartalism holds wonderful rewards for those that can pull the levers, and punishment for those who step out of line. 

The problem with these sorts of central command and control constructs is that they assume that men can act with a wonderful enlightment, with the wisdom and selflessness of angels.  Unfortunately they do not often do this.  Such a system is the preferred tool of autocrats, and is inherently inimical to openness and democracy, always requiring secrecy and unilateral power.

“The Constitution is not an instrument for the government to restrain the people, it is an instrument for the people to restrain the government - lest it come to dominate our lives and our interests.” Patrick Henry

One can rationalize almost anything in the service of the power that sets all value and serves none other.  It becomes a matter of duty, of merely following orders.  As an official of another empire destined to its decline once asked, "What is truth?" and then turned and washed his hands of it, which was the expedient thing to do.  Truth is what the few say it is, when the hubris of the will to power is at its zenith. And then it consumes all, for the will to power serves none but itself.

I think there will be a tipping point, some catalyzing event which will spark an unavoidable reaction in the public, in which the people will finally stand and demand justice.  And then some change will come, for good or ill. We are seeing the early stages of that in the world today and in many places where the people are suffering.

What Next from the Fed: the Obvious, More of the Same, Secrecy, and Inevitably Devaluation

I suspect that this is a 'trial balloon' story that the Fed sends out as a means of informing its constituents about the likely paths of it policy, to solicit feedback and prepare the way.

What is most disappointing is that they are considering the obvious, and more of the same.

The cutting of the interest paid on reserves to zero is something which I have been predicting for some time, despite serious wonkish scoffing from some economic circles that I will not shame to mention. No, it is not a useless or meaningless thing to do.

That will be a real move to ZIRP. But it also removes a welfare payment to a few of the Too Big To Fail Banks which are still remarkably insolvent and running on unsustainable business models, so the Fed will proceed slowly. That is the real 'technical issue.' The Fed never paid such interest before, so to say now that it is a systemic requirement is a bit disingenuous. It is a requirement if your system is broken, and not in the process of being fixed.

As for tweaking their wording, OMG. Benny is losing confidence fast. In the last few statements the Fed was largely talking to themselves. In the second part they make a great deal of playing to foreign creditors. That makes more sense, but we are clearly in that endgame. China does not buy Treasuries because they enjoy the returns on their bonds. They buy them because it is part of the policy of currency manipulation to subsidize their domestic economy. When they decide to stop they will stop. And that goes for the oil states as well, with slightly different motives.

More monetization, the buying of existing debt, gets down to the heart of the program, their game plan, but note please that this is just a way to subsidize the creditors, keeping people in houses that they cannot afford almost at any interest rate. The principal still reflects bubble pricing, and must be reduced. The associated debts will have to be written off, not refinanced.

The Fed is still acting primarily in the interest of the Wall Street banks, and Timmy and Larry are they yes-men in the government.

Based on what I am seeing, when push comes to shove, Benny is going to print, and devalue the dollar, because he sees no other options, lacking the will and imagination to create other choices in addition to merely debasing the currency and stealing the rest of the savings of a generation.

The monied elite do not favor this, and will attempt to promote ridiculous austerity programs, to direct the pain more heavily towards the middle and lower class.

And so the class and currency wars begins to gain momentum.

Washington Post
Federal Reserve weighs steps to offset slowdown in economic recovery
By Neil Irwin
Thursday, July 8, 2010

Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth.

With Congress tied in political knots over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns -- massive infusions of cash, such as those undertaken during the depths of the financial crisis -- but would reconsider if conditions worsen.

Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent. (They know this is not true, but it does not hurt to try and talk up the good news while waiting for a break, even if it is the outbreak of war - Jesse)

But weak economic reports, the debt crisis in Europe and faltering financial markets have led them to conclude that the risks of the recovery losing steam have increased. After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth.

"If the economic situation changes, policy should react," James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview Wednesday. "You shouldn't sit on your hands. . . . I think there's plenty more we could do if we had to."

One pro-growth strategy would be to strengthen language in Fed policy statements that the central bank's interest rate target is likely to remain "exceptionally low" for an "extended period." The policymakers could change that wording to effectively commit to keeping rates near zero for even longer than investors now expect, perhaps adding specifics about which economic conditions would lead them to raise rates. Such a move would be opposed by many members of the Fed policymaking committee who are wary of the "extended period" language, arguing that it limits their flexibility. (zzzzzzz - Jesse)

Another possibility would be to cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25 percent to zero. That would give banks slightly more incentive to lend money to customers rather than park it at the Fed, although it also could cause technical problems in the functioning of certain credit markets. (As I have predicted. The Fed NEVER paid interest on reserves before now. How can it suddenly cause serious problems if they stop it? If they had the nerve, they could take those interest rates mildly negative. That would give the banks some incentive to get the funds moving, although it would be disruptive and would have to be done slowly, with plenty of warning - Jesse)

A third modest possibility would be to buy enough new mortgage securities to replace those on the Fed balance sheet that are paid off as people take advantage of low interest rates to refinance. (More monetization to support the creditors and Wall Street. Oh yeah that will work. - Jesse)

Role of mortgage rates

None of those steps amounts to the kind of massive unconventional effort to drive down mortgage rates and prop up growth that the Fed took in late 2008 and early 2009, when the economy was in a deep dive. Then, the Fed began buying Treasury bonds, mortgage securities and other long-term assets -- more than $1.7 trillion worth by the time the purchases concluded in March. (The Fed and Treasury have done very little to restructure the financial system and the US economy to make it sustainable, and that is their failure. They think Wall Street is the sine qua non - Jesse)

Some economists have encouraged the Fed to launch a new asset-purchase program, saying that with the unemployment rate at 9.5 percent (really north of 17 % - Jesse) and little apparent risk of inflation, (this is not true and it why the Fed is so cautious - Jesse) the Fed should use every tool at its disposal to get the economy back on track.

Fed leaders view such a strategy as likely to have only a small impact on the economy and as carrying a risk of slowing growth.

One of the key ways the earlier securities purchases stimulated the economy was by driving down mortgage rates, which in turn propped up the housing market. But with mortgage rates near all-time lows, it is not clear that actions to lower rates another, say, quarter percentage point would result in much additional home sales or refinancing activity. (It would save some foreclosures perhaps, but the problem is that the wealth transfer from the many to the few is running overtime now that the banking frauds collapsed and they have to scrambled for earnings with great vigor on old scams like price manipulation in the markets - Jesse)

Moreover, the Fed's purchases of mortgage securities have reduced the role of private buyers in that market, and some leaders at the central bank fear that further intervention could delay the resumption of normal market functioning. (ROFLMAO - when it makes sense they will buy regardless of what Benny is doing. They just want subsidies now and high yielding hot money schemes. They are not interested in low paying high risk investments - Jesse)

"The Fed probably believes that unconventional policy does not have much traction as market functioning gets better," said Vincent Reinhart, a resident fellow at the American Enterprise Institute and a former Fed official.

Asset-purchase plan

Another risk is that global investors could lose faith that the Fed will be able or willing to pull money out of the economy in time to prevent inflation. That would lead the investors to demand higher interest rates on long-term loans, which could reverse the rate-lowering effects of the Fed's asset purchases. (This is the inflation risk which I said exists, which they said above does not exist - Jesse)

When the Fed was buying $300 billion in Treasurys in mid-2009, part of its try-everything approach to dealing with the crisis, rates on 10-year bonds temporarily spiked amid concerns that the Fed was "monetizing the debt," or printing money to fund budget deficits. With deficit concerns having deepened in the past year, such fears could be even more pronounced now.

All that said, Fed officials do not rule out launching a major new asset-purchase program. Rather, they say they would consider one only if their basic forecast -- of continued steady expansion in the economy -- proves to be wrong. A key factor that would build support for new asset purchases would be a rise in the risk of deflation, or a dangerous cycle of falling prices -- which has become more of a concern as the world economy slows. (Deflation is a policy choice, always, in a purely fiat currency regime - Jesse)

Fed officials express confidence that they have tools to address the economy further if conditions worsen.

"I think we do have a variety of tools available, and we shouldn't rule any tool out," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview. "If we're uncomfortable with how long it's going to take us to reach either element of our dual mandate [of maximum employment and stable prices], we'll have to make some adjustments to policy."

ECB to Buy Bonds In Secondary Market to 'Address Severe Tensions In Certain Market Segments'

The limit to the ability of a central bank to create money is the acceptability of the underlying bonds and currency.

When a central bank turns to buying the bonds in order to support their price, or more properly the interest rate paid, this is the beginning of the end, the point at which the national currency becomes little more than a Ponzi scheme, creating more money to pay the interest on the old money.

Now both the US Federal Reserve the Bank of England, and the ECB have fallen into this. We are seeing the controlled demolition of the fiat currencies of the developed world. This will resolve itself no later than 2018, and probably before that. For that is the outer bound of when the US will be unable to service its debt without at least a selective default, a draconian diktat, or resort to hyperinflation.

Bloomberg
ECB to Intervene in Bond Market to Fight Euro Crisis
By Gabi Thesing, Jana Randow and Simon Kennedy

May 10 (Bloomberg) -- The European Central Bank said it will buy government and private bonds as part of an historic bid to stave off a sovereign-debt crisis that threatens to destroy the euro.

The ECB wants “to address severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy,” the central bank said in a statement today, minutes after European finance ministers announced a loan package worth almost $1 trillion to staunch the market turmoil.

The central bank said it will intervene in “those market segments which are dysfunctional,” signaling it views the recent surge in some of the region’s bond yields as unjustified. Policy makers are seeking to restore confidence in markets and protect the economy from a double-dip recession. The bank said the moves won’t affect monetary policy and the resulting liquidity will be reabsorbed.

“They are not cranking up the printing presses,” said James Nixon, co-chief European economist at Societe Generale SA in London. “This is a much more targeted, surgical approach. They buy the duff stuff that no one in the market will touch...”

...While the ECB cannot buy bonds directly from governments, the euro’s founding treaty doesn’t ban it from doing so in the secondary market, providing the bank with some room to execute today’s plan. The bank’s council will decide the scope of the intervention.

Bundesbank President Axel Weber said May 5 that the threat of contagion from Greece’s fiscal crisis didn’t merit “using every means.” Without referring specifically to bond buying, he said “measures that damage the fundamental principles of the currency union and the trust of the people would be mistaken and more expensive for the economy in the longer term...”

Treasury to Resume the Monetization of the Fed's Programs to Support the Wall Street Banks

"It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder." Frederic Bastiat

This Treasury Supplemental Financing Program is designed to provide public funds for the Fed's efforts to purchase and then liquidate toxic assets and derivatives from the financial sector, effectively absorbing their losses and monetizing them.

The Treasury creates new notes and sells them on the open market. The money obtained in these sales is deposited at an account at the Federal Reserve. The Federal Reserve uses this money to purchase toxic assets from the banks at its own discretion and pricing, subject to little oversight and market discipline.

Senator Chris Dodd said "the Fed could become an 'effective Resolution Trust Corporation,' purchasing and ultimately disposing of depreciated assets.

It looks very much like a stealth bailout. It is even more of a scandal because of the Fed's resistance to any disclosures on the principles and specifics by which they are allocating taxpayer money.

Where this gets even more interesting is that the Fed in turn is buying Treasury debt after issuance through its primary dealers, debt that was issued by the Treasury to provide funds to the Fed.

Even more than a stealth bailout, this is starting to smell like 'a money machine.' Money machines are what Bernanke euphemistically called 'a printing press.' What is odious about this particular printing press is that the output is being given directly to a few big banks by a private organization which they own.

I believe that it is still illegal, by the letter of the statutes, for the Fed to directly purchase Treasury paper. But in this case, the Fed is buying Treasury paper with money supplied by the Treasury. Since the paper is passing through the marketplace, and the Primary Dealers are taking their commissions, it may be in conformance with the letter of the law. But it looks like it violates the spirit of the law.

And given that in many cases the Primary Dealers are the principal beneficiaries of the subsidy programs, selling their toxic debt to the Fed at non-market prices, this starts to appear like a right proper daisy chain of self-dealing and fraud.

As you can see from the background information below, this is a 'temporary' program from 2008 that the Treasury keeps promising to 'wind down.'

This is not a resolution trust by any measure. One only has to compare what happened with the Savings and Loan Resolution Trust, with the orderly liquidation of assets, losses assumed by the individual banks and their management, and investigations and prosecutions for fraud.

And the bankers involved in the Savings and Loan bubble and collapse were not still in business and giving themselves record bonuses within twelve months of their collapse, and engaging in the same frauds and speculation that led to the crisis.

Wall Street bonuses jumped 17 percent last year
SteveEder and Jonathan Stempel
Tue Feb 23, 2010 2:39pm EST

NEW YORK (Reuters) - Bonuses on Wall Street rose 17 percent last year to $20.3 billion even as the industry faced a public backlash over pay practices.

The rise in payouts, reported by New York State's comptroller, came at a time when Wall Street was recovering from the financial crisis of 2008, which forced a taxpayer rescue of the industry that, in turn, stoked widespread anger across
the United States.

Comptroller Thomas DiNapoli said on Tuesday profit for all of Wall Street could top $55 billion for 2009, nearly triple the previous record year. Last year, the U.S. economy began to stabilize and lenders raced to repay federal bailout money they had come to view as a stigma."

Further, the Savings and Loan bankers were not flooding the Congress with lobbying money to hinder reform of the banking system, and to shift the focus of Congressional discussion to the reduction of legitimate programs like Social Security to finance the public subsidies being given to the very banks responsible for the financial crisis in the first place.

As a possibly related aside, today's US Treasury 2 year auction was unusual. Indirect Bidders had 100% of their bids filled as noted by ZeroHedge.

MarketWatch
Treasury to expand Supplementary Financing program
By Greg Robb
Feb. 23, 2010, 12:01 p.m. EST

WASHINGTON (MarketWatch) -- The Treasury Department announced Tuesday that it is expanding its Supplementary Financing Program to help the Federal Reserve manage its enormous balance sheet. In a statement, Treasury said it will boost the SFA to $200 billion from its current level of $5 billion. The fund had been up to $200 billion but was scaled back when Congress delayed passage of an increase in the debt limit.

Now that an expansion of the debt limit has been signed into law, the department is able to resume the program. Starting on Wednesday, Treasury will conduct the first of eight weekly $25 billion 56-day SFP bills to restore the program. The department said it will then roll the bills over. "We are committed to work with the Fed to ensure they have the flexibility to manage their balance sheet," a Treasury official said.

September 17, 2008
HP-1144
Treasury Announces Supplementary Financing Program

Washington- The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week. To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.

The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

Calculated Risk
Treasury to Unwind Supplementary Financing Program
11/17/2008

One of the credit indicators I was tracking was the activity in the Treasury's Supplementary Financing Program (SFP). This was the Treasury program to raise cash for the Fed's liquidity initiatives.

Once the Fed started paying interest on reserves, the supplemental financing program wasn't needed any more to sterilize the expansion of the Fed's balance sheet. The Treasury announced today that the program will be unwound...

As it should be obvious, these guys cannot give up the needle on their own.

CFR: When the Fed Stops Monetizing US Sovereign Debt...

The people at the Council on Foreign Relations speculate that US interest rates on Treasury debt will be increasing around the end of the first quarter if the Fed discountinues its monetization of mortgage debt.

As the Fed has essentially purchased ALL new US Treasury issuance since 2009, that seems to be a reasonable bet.

"The Federal Reserve plans to stop buying securities issued by government housing loan agencies Fannie Mae and Freddie Mac by the end of the first quarter.

This is not only likely to push up mortgage rates; Treasury rates should rise as well. Throughout 2009, the private sector sold a portion of their agency holdings to the Fed and used those funds to buy Treasurys.

Once the Fed’s agency purchases stop, this private sector portfolio shift will end, removing a major source of demand in the Treasury market.

As the chart shows, since the start of 2009 the Fed has bought or financed the entire increase in Treasury issuance. As Fed purchases slow and Treasury issuance continues at a high level, interest rates will have to move up to attract new buyers."

Monetization: Treasury Adds $400 Billion in Bailouts for Fannie and Freddie

What's another $400 Billion in monetization so that Fannie and Freddie can keep buying up mortgage debt?

Timmy and Ben can resolve to distribute dollars even as they approach a virtual insolvency because they can create them, seemingly out of nothing. The payment obligation for their dollar debt is their own creation -- dollars. But they cannot hand out endless amounts of nature's wealth, things like oil, gold, grains, and silver except as they may possess them by industry, force, or fraud.

And that is what frustrates the statists and monetarists, why the western central bankers hate and fear the precious metals as monetary equivalents and alternative stores of wealth, and deploy their worldly power in proximity to sources of energy. Natural wealth defies their control, is a mirror to their excesses, and a stumbling block for the financial engineering that is the basis of their fractional reserve central banking and a desire for world government and ever-increasing power. Ponzi schemes must inherently continue to expand.

They say fiat, let it be done, according to our will. But natural wealth does not always respond as they wish, and its silence is a profound repudiation.

The full extent of their power to command and control the liquidity flow of the world will be tested in 2010.

".....Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck."

Demand For US Fixed Income Has To Increase Elevenfold... Or Else - ZeroHedge

And this, meine Damen und Herren. Mesdames et Messieurs, may result in higher interest rates and a taxing drag on the productive economy. Which economies specifically and to what extent depends on how well the Fed and the Treasury can shift the pain of their excesses to the rest of the world. But it is not what one might call deflationary, and an impulse for the US dollar as a stable store of wealth, unless by force or fraud.

AP
Treasury removes cap for Fannie and Freddie aid
By J.W. Elphinstone, AP Real Estate Writer
December 25, 2009

NEW YORK – The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac. ("Its" ATM card? Don't you mean the holders of US dollars? - Jesse)

The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years.

Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.

By making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress.

While most analysts say the companies are unlikely to use the full $400 billion, Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government's commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows.

"The companies are nowhere close to using the $400 billion they had before, so why do this now?" said Bert Ely, a banking consultant in Alexandria, Va. "It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."

Fannie Mae and Freddie Mac provide vital liquidity to the mortgage industry by purchasing home loans from lenders and selling them to investors. Together, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Without government aid, the firms would have gone broke, leaving millions of people unable to get a mortgage.

The biggest headwind facing the housing recovery has been the rise in foreclosures as unemployment remains high. The two companies, facing mounting losses from mortgage defaults, were taken over by the government in September 2008 under the authority of a law Congress passed in the summer of 2008.

So far the government has provided $60 billion to Fannie Mae and $51 billion to Freddie Mac. The assistance is being provided in exchange for preferred stock paying a 10 percent dividend. The Bush administration first pledged up to $100 billion in support for each company, an amount that was doubled to $200 billion for each by the Obama administration in February.

Treasury officials will provide an updated estimate for Fannie and Freddie losses in February when President Barack Obama sends his 2011 budget to Congress. Though the administration has yet to disclose its long-term plans for the two companies, they are unlikely to return to their former power and influence.

The news followed an announcement Thursday that the CEOs of Fannie and Freddie could get paid as much as $6 million for 2009, despite the companies' dismal performances this year.

Fannie's CEO, Michael Williams, and Freddie CEO Charles "Ed" Haldeman Jr. each will receive $900,000 in salary, $3.1 million in deferred payments next year and another $2 million if they meet certain performance goals, according to filings with the Securities and Exchange Commission.

The pay packages were approved by the Treasury Department and the Federal Housing Finance Agency, which regulates Fannie and Freddie....

The Trend in the Freddie Mac US Housing Price Index

I suspect that the US Treasury and the Fed will continue to monetize the decline in housing prices and the mortgage market. We may see an inflation so that this trend is never realized in nominal values. Ultimately, the government may bury most of the losses in a currency devaluation.

US Housing: Four More Years to Fall - Michael White

"The exhaustive Freddie Mac price index fell 2% nationwide in the 3rd quarter and analysis of its data predicts prices will continue to fall for the next four years.

While Freddie announced Tuesday that its purchase-only index has gained for the past two quarters, the “Classic Series” of the Conventional Mortgage Home Price Index, which includes refinance appraisals as well as purchase values, has fallen 9% from the high in June 2007 and 3.8% for this year.

The projections say homeowners have lost only $1 for every $3 they can expect to lose in the end.

The trends show values will fall for four years through September 2013. Readers should take this estimate as an educated guess. The estimate may have greater relevance than forecasts described in mainstream-media headlines which typically fail to place new data within a long-term trend..."

Treasuries Fall After Weaker Than Expected Results in the Ten Year Auction

Interest rates rose and stocks and commodities faltered a bit on the result of this ten year treasury auction which was weaker than this Bloomberg piece suggests.

Metals declined as a reflexive reaction to 'higher interest rates.' The hit on the metals preceded the release of the results, in yet another bear raid by the Wall Street banks holding undeliverable short positions.

Foreign central banks were noticeably light buyers, much preferring the shorter durations like the three year.

Primary Dealers took a big chunk of the offering. Current trends suggest that Ben will take it off their hands through monetization.

The Fed will be under signficant pressure to buy the bonds as the bias to the short end of the curve creates imbalances that precipitate a funding crisis, and a possible currency crisis, at the Treasury in 2010 if this trend continues. It is unlikely that they will raise rates when monetization is a viable, if not preferred, option.

Geithner looks likely to be replaced in 2010 by a Treasury Secretary who is more 'seasoned' and who will guide the US multinational banking industry through what could be later known as the currency wars, analagous to the trade wars that occurred in the Great Depression. One might even say that they are already underway.


Bloomberg
Treasuries Fall After $21 Billion Auction of 10-Year Notes
By Cordell Eddings and Susanne Walker

Dec. 9 (Bloomberg) -- Treasuries fell after the U.S sold $21 billion of debt maturing in 10 years, the second of three note and bond auctions this week totaling $74 billion.

The notes drew a yield of 3.448 percent, compared with the average forecast of 3.421 percent in a Bloomberg News survey of seven of the Federal Reserve’s 18 primary dealers. The bid-to- cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.62, compared with an average of 2.63 at the past 10 auctions.

“Investors are not sure they want to be holding this many Treasuries going into a year where duration is going to be extending and rates may go higher,” Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., said before the auction. BNP is one of the primary dealers, which are required to bid at Treasury auctions.

The yield on the current 10-year note rose five basis point to 3.44 percent at 1:02 p.m. in New York, according to BGCantor Market Data.

Indirect bidders, an investor class that includes foreign central banks, bought 34.9 percent of the notes at today’s auction. They purchased 47.3 percent at the November sale. The average for the past 10 auctions is 39.1 percent...

The spread between yields on 2-year and 30-year Treasuries touched 366 basis points as the U.S. prepares to sell $13 billion of bonds tomorrow. The last time the spread was so large was 1992, when the Federal Reserve cut interest rates to bolster growth after a recession...

Speaking of Garish Bling, the US Long Bond Is On Sale Today

Some US institutions are being compelled by new government regulations to buy long bonds to 'match duration' of their obligations per a ruling of a few years ago.

Other than that, anyone buying the 30 year bond, other than for the Fed carry trade, in an time of quantitative easing and free spending government, should be institutionalized.

The Fed bond carry trade is when the primary dealers buy Timmy's bond with Ben's money, and then sell it back to the people's short term debt in dollars via the Fed. It keeps yields on the long end down, and maintains the appearance of stability. The dealers get to front run the buys and short the sells.

It is a pyramid scheme to accomplish a short term objective.

MarketWatch
Treasurys edge up before long bond auction
By Deborah Levine
Nov. 12, 2009, 11:11 a.m. EST

NEW YORK (MarketWatch) -- Treasury prices edged up Thursday as investors anticipated the government would garner sufficient demand for a record amount of 30-year bonds sold during the session.

The $16 billion bond sale follows two major note auctions earlier in the week that were met with plenty of demand from investors.

Traders also pointed to a significant amount of maturing debt and coupon payments when the auctions settles that create a natural bid, as investors may roll that cash into the new securities.

"After the success of the first two offerings, this one is also expected to garner good support too," said analysts at Action Economics. "There remains a lot of cash to invest."

Reserve Bank of India Buys 200 Tonnes of the IMF's Gold

An apertif for the Indian central bank, and barely a nibble for dollar heavy China.

"You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold." George Bernard Shaw

LiveMint WSJ
RBI to buy 200 tonnes of IMF gold
By Tamal Bandyopadhyay and Anup Roy
Mon, Nov 2 2009. 11:15 PM IST

Decision to strengthen its gold reserves follows similar moves by central banks of some other countries.

Mumbai: The Reserve Bank of India, or RBI, is buying 200 tonnes of gold from the International Monetary Fund (IMF), nearly half of what the fund plans to sell.

In 1991, when India faced its worst ever balance of payment crisis, the country had to pledge 67 tonnes of gold to Union Bank of Switzerland and Bank of England to raise $605 million (Rs2,843.5 crore today) to shore up its dwindling foreign exchange reserves, which were then barely enough to buy two weeks of imports. India’s foreign exchange reserves were at $1.2 billion in January 1991 and by June, they were depleted by half. Currently, the Indian central bank’s foreign exchange reserves stand at $285.5 billion.

RBI’s decision to shore up its gold reserves needs to be seen in the context of other central banks across the globe increasing their gold reserves. Among them are the central banks of China, Russia and a few countries in the European Union. (also known as 'the barbarians' - Jesse)

In the last one year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%.

Compared with this, India’s central bank did not add anything to its gold reserves in the last one year, according to Bloomberg data.

In fact, the share of gold in India’s total reserves has dwindled over the decade.

In March 1994, the share of gold in the total reserves of the country was 20.86%; by the end of June 2009, gold constituted only 3.7% of the total reserves.

An IMF spokesperson in India declined to comment on this development.

RBI’s foreign currency assets consist mainly of sovereign bonds, mainly US treasurys. So, buying more gold will help the Indian central bank diversify its assets.

“Gold as a proportion of our reserves is relatively small,” said R.H. Patil, chairman of National Securities Depository Ltd and Clearing Corp. of India Ltd.

“Gold is the ultimate currency. In fact, only gold came to our rescue during (the) 1991 crisis, so it makes sense that RBI should try to increase its gold holdings,” Patil said.

RBI’s foreign exchange reserves consist of foreign currency assets, gold, special drawing rights (SDR)—an international reserve currency floated by IMF—and RBI funds kept with IMF.

Out of RBI’s $285.5 billion foreign exchange reserves, foreign currency assets account for the most—$268.3 billion—followed by gold ($10.3 billion), SDR ($5,267 million) and reserve position in the IMF ($1,589 million).

According to RBI’s latest annual report, the foreign currency assets consisting of foreign securities declined by Rs81,010.25 crore from Rs12.98 trillion on 30 June 2008 to Rs12.17 trillion on 30 June 2009 mainly due to net sales of dollars in the domestic foreign exchange market.

At the current market value of $1,054 an ounce, or per 28.5g, RBI would need to spend about $7.4 billion to buy 200 tonnes of gold. With this, its gold reserve will rise to $17.716 billion, or roughly 6.20% of the total reserves.

IMF in September had announced that it wanted to sell 403 tonnes of its gold reserves, or one-eighth of its total holdings, to boost its finances on a long-term basis and to generate money to raise lending to needy nations. Under the concessional lending facility, IMF will lend at zero interest through end-2011 for all low-income members to help them tackle the impact of the financial crisis that rocked the world in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc.

A committee set up by a group of central banks overseeing the gold sales by the IMF has allowed the fund to sell 400 tonnes of its gold annually and 2,000 tonnes in total during the five years starting 27 September.

According to a report by the Associated Press dated 20 September, India, along with China and Russia, had evinced interest in buying IMF-held gold.

At a total holding of 103.4 million ounces, or 3,217 tonnes, IMF is the third largest official holder of gold after the US and Germany.

IMF’s total holding at historical price is valued at about $9.2 billion on its balance sheet. At market prices, as of 28 August, the fund’s total gold holdings were worth $98.8 billion.

This Is Your Economy on Credit Crack - and Heading for a Crack-Up

Here is a clear and simple explanation of why we may have already passed the point at which the Fed and Treasury will have no choice but to substantially devalue the bonds and reissue a 'new US dollar' as part of a managed default on our sovereign debt.


Ben's Un-shrinkable Balance Sheet
Delta Global Advisors
April 14, 2009

As he stated again clearly today, the Chairman of the Federal Reserve has deluded himself into thinking that when the time comes, he will be able to shrink the size of the Fed's balance sheet and reduce the monetary base with both ease and impunity. He also has deluded himself into thinking inflation will be easily contained.

It is very important that he does not fool you as well.

The Fed believes low interest rates should not be the result of a high savings rate, but instead can exist by decree, a conviction which has directly led consumers to believe their spending can outstrip disposable income.

The result of such thinking has been a rise in household debt from 47% of GDP in 1980 to 97% of total output in Q4 2008. As a result of this ever increasing burden, the Fed has been forced into a series of lower lows and lower highs on its benchmark lending rate. Keeping rates low is an attempt to make debt service levels manageable and keep the consumer afloat. Problem is, this endless pursuit of unnaturally low rates has so altered the Fed's balance sheet that Mr. Bernanke will be hard-pressed to substantially raise rates to combat inflation once consumer and wholesale prices begin to significantly increase.

Banana Ben Bernanke has grown the monetary base from just $842 billion in August 2008 to a record high of $1,723 billion as of April 2009. But it's not only the size of the balance sheet that is so daunting; it's the makeup that's becoming truly scary.

Historically speaking, the composition of the Fed's balance sheet has been mostly Treasuries. And the Federal Open Market Committee would typically raise rates by selling Treasuries from its balance sheet into the market to soak up excess liquidity. However, because of the Fed's decision to purchase up to $1 trillion in Mortgage Backed Securities (and other unorthodox holdings), it will not be selling highly-liquid US debt to drain reserves from banks. Rather, it will be unwinding highly distressed MBS and packaged loans to AIG. Not to mention the fact the Fed would have to break its promise of being a "hold-to-maturity investor" of such assets.

Moreover, not only are the new assets on the Fed's balance sheet less liquid but the durations of the loans are being extended. According to Bloomberg, the Fed is contemplating extending TALF loans to buy mortgaged backed securities to five years from three after pressure it received from lobbyists and a failed second monthly round of auctions. That means when it finally decides it's time to fight inflation, the Fed will find it much more difficult to reverse course.

But because of the extraordinary and unprecedented (some would say illegal) measures Mr. Bernanke has implemented, only $505 billion of the $2 trillion balance sheet is composed of U.S. Treasury debt. Today, most Fed assets are derived from the alphabet soup of lending programs including $250 billion in commercial paper, $312 billion of Central Bank liquidity swaps and $236 billion in mortgage-backed securities.

Thus, our economy has become more addicted than ever to low interest rates. But because bank assets will now be collecting income at record low rates, when and if the Fed tries to raise rates it will only be able to do so on the margin. If Bernanke raises rates substantially to fight inflation, banks will be paying out more on deposits than they collect on their income streams. Couple that with their already distressed balances sheets and look out!

Additionally, not only do the consumers need low rates to keep their Financial Obligation Ratio low, but the Federal government also needs low rates to ensure interest rates on the skyrocketing national debt can be serviced. Our projected $1.8 trillion annual deficit stems from the belief that the government must expand its balance sheet as the consumer begins to deleverage. In fact, both the consumer and government need to deleverage for total debt relief to occur, else we're just shuffling debts around and avoiding a healthy deleveraging entirely.

In order to have viable and sustainable growth total debt levels must decrease, savings must increase and interest rates must rise. But that would require an extended period of negative GDP growth-a completely untenable position for politicians of all stripes. Ben Bernanke would like you to believe inflation will be quiescent and he can vanquish it if it ever becomes a problem. Just make sure you don't invest as though you believe him.

Here Come the Coupon Purchases by the Fed

The Fed made this announcement and the ETF we use to short the Treasury bond, TBT, took a nose dive.

FAQs on Fed Monetization of US Debt





Fed to start buying Treasurys on Wednesday
By Deborah Levine
2:58 p.m. EDT March 24, 2009

NEW YORK (MarketWatch) -- The Federal Reserve Bank of New York will begin making purchases Of U.S. Treasury securities on Wednesday, starting with debt maturing between 2016 and 2019.

It will continue purchases on Friday and next week, with some days dedicated to purchases of maturities as short as 2-year notes with others for debt maturing in 17 to 30 years, it said in a schedule posted on its website Tuesday.

It did not indicate how much it would buy. The Fed announced last Wednesday it would purchase up to $3000 billion in Treasurys over the next six months. Treasurys rallied, with yields on 10-year notes (UST10Y UST10Y) paring an earlier increase to traded up 1 basis point to 2.66%.

The Fed's Decision: PRINT

To net today's FOMC statement for you, the Fed has made an aggressive commitment to monetary expansion through its balance sheet to support the financial system.

What was particularly repugnant was the co-ordinated actions in the market ahead of this announcement. This included a major bear raid on the precious metals, and the panic-covering of the financial shares before the official announcement. The cure of the crisis ought not to be an occasion for looting, fraud, deception, and personal enrichment by insiders who in many cases caused the problems which are facing today.

The US government is engaging in the same artificial tactics that lead to the tech bubble and the housing bubble. They are artificial because they are not accompanied by systemic change and meaningful reform. We are shooting the patient with morphine so they can go back to work without treating the disease.

The next phase of this financial credit crisis may be take down the US Bond and the dollar. That is what is known as a financial heart attack.

Release Date: March 18, 2009
FOMC Statement

For immediate release

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.

Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession.

Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these
securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.

Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.