use trickery and deceit because they are weak…"
quote I pinched from the movie: Attila the Hun, where Attila
assesses the crafty Roman Army. But it was not until I looked
over at my dog that I realized that human or animal, it has always
been about territory. And U.S. Dollar policy makers, headed by
Alan Green-spin and Paul O-kneel, are peeing all
over the world today - Ed Bugos.
underestimate the power of the word, I read (irony) once somewhere,
and yet, that is all that the Treasury has got going for them today.
we viewed the world this way?
Have you ever wondered why it is that banks have not had to compete
with the free market for your deposits? If they really wanted your
capital, they would raise their deposit rates to attract it, wouldn't
they? But instead of paying us for capital, in this strange world
we pay them to store it for us - after deducting all of the fees
and inflation that they charge for other "valuable" services that
is. A term deposit pays a little more than a savings account, but
you have to surrender some withdrawal privileges - and even then,
it is still not enough to lure considerable capital away from the
any rate, the main reason that banks don't need to compete is that
they have learned how to extort the Fed into providing them with
boundless deposits to invest in higher yielding markets - traditionally
mortgage, treasury, and municipal debt. As the lines of distinction
between banking, brokerage and investment banking blurred, their
investment portfolios have necessarily grown to include exposure
to riskier assets, such as technology and telecom paper. Soon it
will also include Real Estate, if the Fed has its way with deliberations
now in progress. If there is an investment fact that is still not
appreciated enough today, it is that as the risk of the asset increases
so does the probability that the Fed will have to come to the rescue
at some point, even if to rescue the counterparty(s) that the risk
has been shifted to. That is the nature of the extortion: banks
know that Mr. Greenspan will write the check, so they will do the
we live in a remarkable epoch where stock and bond markets earn
double-digit returns, and perceptible inflation rates are expected
to be enduringly low, consumers and baby boomers alike have become
more aware of the broader array of savings options available to
them outside of the banks over the years. Interestingly, the banks
have responded by virtually taking over the capital markets. You
can't get away from them. They've bought many of the brokerages
where you might store your T-bills so that they have access to your
capital without having to raise deposit rates to attract it. And
although they cannot use your segregated securities as collateral
for their investment ambitions, at least not directly, they could
and do easily use the cumulative non-segregated cash balance for
they could also enter into all manner of swaps and other alchemies,
which may effect a reclassification of a broader array of assets
as being of money quality. We're thinking specifically of what Wall
Street hazily calls the money market today, where bankers and financial
companies do their dirty laundry. Most of the short end of the yield
curve in this market qualifies as M3 now. In other words,
they have the ability to manufacture their own capital - independent
of the Fed.
another way to access capital, though a little more expensively,
is to issue equity or debt through the same markets, preferably
to their own customers who might also fortuitously store the newly
acquired paper at a brokerage, which the bank owns. And whereas
it makes little economic sense to use leverage to invest in a deposit,
it might be profitable to use leverage for investment in a bank
stock issue or bond - provided there is liquidity.
makes big money sense particularly when the buyer is a large institution
such as Fannie Mae that does not need to have any meaningful reserves
on hand in order to guarantee the bulk of the nation's mortgages.
So long as it engages in the daily activity of buying them from
the bankers, the bankers will return the favor and buy their debt
and equity, which they can classify as money now because the size
of the contingent liability has become too big for the Fed to allow
failure. Is this not true? Sure it is. It's the American dream -
no money down upside down capitalism! With the creation of Fannie
Mae and Freddie Mac, the banking system had created another way
to manufacture money. Now, by allowing it to grow so large, it has
also effectively put a gun to the Fed's head.
is the liability, or threat, exactly? I think that in a monetary
system like this its mere existence will create demands on the borrower
for either cash or performance. Since performance in the money business
is all about more money, the demand will be on the Fed to support
those obligations with the liquidity that the creditors demand.
In other words, to keep the credit cycle going forward rather than
reverse, because in reverse, the darn things aren't redeemable -
there is no liquidity. Interestingly, as I reread this paragraph
I could not help but think about how German peoples must have interacted
with the pressure of their nation's indebtedness after WWI and just
before the 1923 explosion in inflation.
suppose that the Greenspan Fed, already moving on this pressure,
wins control over the mortgage markets. What better way to provide
creditors with liquidity then to acquire a mandate to print it on
demand, or in other words, to provide the mortgage markets with
an everlasting bid? How are they going to acquire that mandate?
With the claim that the growing government budget surplus will make
US Treasury securities obsolete. Of course, the hope is probably
that it will never come down to anything more than a contingent
promise to offset a contingent liability, but in spirit, they will
acquire control over the mortgage markets, and they will provide
enough liquidity to convince us that they stand by their promise.
Ok, so we're speculating a little, but I'll be darned if it is not
gonna' happen this way, more or less. And guess who will bail them
out? Perhaps the Bank for International Settlements will, whose
board is now occupied by Greenspan. But if not, it will be you and
I, as always, count on it.
while everyone keeps borrowing, nothing beats the privilege that
a tier I US bank attains by having all the liquidity available to
it that it wants for a cost, which is substantially less than the
prevailing market rate, courtesy of the Fed, without which, deposit
rates would surely have to soar to support the bank's increasingly
ambitious investment needs.
difference between what the bank would have to pay you for your
capital and what it pays the Fed now is the difference between the
natural interest rate and the fixed government rate. This discretionary,
thus theoretical, difference is the main source of economic distortion
today, primarily because there is absolutely no discipline to prevent
it from self-correcting. Alas, while policy makers have thoughtfully
constructed self-correcting mechanisms all around them, they have
forgotten to provide such a mechanism to correct the human proclivity
for greed and optimism, particularly with regard to the conduct
of monetary policy.
if the world really worked this way, which I know it doesn't because
I just reviewed my old Keynesian authored economics textbook from
college just to double check my theory, then the capital, which
banks refer to as reserves becomes worth much, much less, if the
credit happy merry-go-round that we call an economy suddenly stops.
For the paper is only redeemable if the credit reshuffling business
remains a "going concern." Yet increasingly, that is the very question.
Is the credit cycle too mature to grow?
course, if we were writing for a newspaper we could probably end
the article right there because I think we all know the answer.
But we aren't, so let's see what else we can say about it: it is
too mature to grow at this point without obliterating the
purchasing power of the dollar unit.
Month in The Goldenbar Report:
contingent liabilities has the strong dollar wrought on the US
/ global economy?
the Federal Reserve have an interest in Real Estate? If so, how
far do they plan to take it?
the trade deficit a hot potato, or a cruch?
brief focus on the consumer and the difference between nominal
and real net worth.
prices break down and gold prices/XAU begin to break up!!
you ready for what's around that corner? If not, US $100 can make
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Edmond J. Bugos
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