FedUpUSA

Archive for the ‘US Dollar’ Category

This is amusing to wake up to on a Monday morning….

The strengthening U.S. economy is proving no deterrent to the biggest rally in Treasuries since 2008, and America’s largest bank says it may get even better for bond investors.

Uh huh.  It’s called “fear” and it’s been driving money into the US and, specifically, into Treasuries.  It’s rather obvious with just a cursory look at the FX and Treasury markets.

The rally in Treasuries accelerated since October even as reports showed improvements in everything from consumer confidence to jobless claims to manufacturing.

Uh, no.  The rally accelerated since October since the threat of a Euro zone blowup has gone sky-high.  Money goes somewhere and the “somewhere” is here, at least for now.

The problem with this fear trade is this — if those fears become realized then the so-called “money” evaporates.

Huh, you say?  Yes, I said evaporates.

Remember folks, “money” comes into existence because someone pledges some sort of collateral for the debt that is on the other side of the ledger.  It’s a balance sheet and, as the name implies, always balances.

So let’s ask the question: What happens when there’s no more collateral?

That’s what happened, basically, in 2007 and 08.  The system ran out of people willing to pledge collateral because it had already all been pledged!  The “last and biggest” was in residential real estate, which is a mighty big asset base.  When that was all pledged (among those willing and able to pledge it) the monster started feeding on its own blood and the dollar went up while all those leveraged “asset” prices went down.

Now you’re seeing the same thing in Europe, and people are trying to flee here.  But US Treasuries with duration risk are pretty damn dangerous for the same reason — all lending to a sovereign government is both risky and uncollateralized, as it rests on nothing more than the government’s promise to tax the citizens tomorrow to pay that debt.  That premise, in turn, rests on people being willing to labor tomorrow for money they don’t get to keep as it was already spent!

Well, would you lend to someone making that promise but is already running a 43% deficit to received tax revenues when one looks at the total budget?

I sure as hell wouldn’t.

So for now we look like the best house in a crap neighborhood.  But in fact it’s all crap.  The question that remains is when we’re going to stop being stupid and have the government stop spending more than we make.  The answer is “not tomorrow, and not today.”

This of course leads to the next inconvenient question, which is “how rich are levered assets of all sorts — which means anything supported by a debt directly or indirectly in the market” against fundamental value if and when all of that debt — and the money issued against it — disappears?

The answer is not pleasant to contemplate.

Consider things thought of as “unlevered” such as physical gold.  Of course the problem is that gold is bought and sold using leverage every day on the futures market, at various leverage ratios from 2:1 for those investing in ETFs on margin to 10:1 or so for those using futures.  Remove all that leverage and the price could easily collapse by 90% in nominal terms!

Look at oil.  Same deal due to the same markets.  Stocks?  Same issue; not due to ordinary margin loans but effectively-uncollateralized gambling by HFT robots and futures markets.   Equities are “somewhat” better in that they are at the core supported by dividends — the return of actual capital from operations — but hose dividends rely on a levered free cash flow through the economy to remain payable.  Get rid of all of that and what dividends get paid and where is fundamental value?  Hint: S&P 300 is not unreasonable.

Housing?  What’s the down payment required nowdays?  Have we even gotten back to 20% down requirements?  Well, if we were, then it could be argued that a house is 5x overvalued!  But we’re not, of course.  Now I suspect that even in the worst of times we won’t get to 100% cash buys on houses only, although I can make a cogent market and economic stability argument that we should.

Therefore, expecting another 80% collapse in house prices is probably unrealistic.  But a 50% one?  Entirely possible and reasonable.

I find it amusing that people think this sort of outcome “can’t” or “won’t” happen.  It most-certainly can and likely will.  It has before and there’s no particular reason to believe it won’t this time around.  Indeed, what we continually see through our so-called “leadership” is a refusal to accept fundamental mathematics — specifically, that their overspending has created a debt-fueled overhang that cannot by sustained indefinitely.

Europe has done nothing to solve the essential problem — the political promise of services that cannot be funded with current tax revenues, and the inescapable reality that this must eventually end.  When it does the multiplication effect that this overspending has had on prices and output in the Continent will reverse.  That in turn will force GDP down to where it is supported by actual economic surplus.  Margins, being levered against cash flow, will contract dramatically and as Larry Kudlow loves to say “profits are the mother’s milk of stocks.”

Well Larry, in this case mommy sucked down a drink full of arsenic, the milk is poisonous, and mommy is writhing on the floor in agony as she draws her last breath.

The only way to value the dollar is in the context of a mercantilist, export-dependent global economy anchored by a sole “importer of last resort,” the U.S., which funds these vast imports with its fiat currency, the dollar.

Yesterday I explained why a gold-backed currency cannot replace the fiat dollar without fatally disrupting global Capitalism and the political Status Quo everywhere from China to Europe: Why the U.S. Dollar “Works” and Why a Gold-Backed Currency Doesn’t(September 7, 2011).

Today we look at why the fiat dollar is the one essential currency, and as a result, why it will rise in value in the Eurozone crisis ahead.  I know this is heresy and sacrilege to those who believe the dollar is doomed, and soon, but if you’re not yet locked into one quasi-religious faith or another just yet, then please follow along as I trace out the dynamics of trade and currency valuation.

To understand the essential role of the dollar and how its value is derived via trade flows, let’s start with a simplified model of global trade.

Country A manufactures surplus goods and generates surplus services. Since its domestic demand is structurally constrained (for example, a mere 35% of China’s GDP is domestic demand), the only way Country A can keep its citizens employed and politically pliable is to sell its surplus in other countries.

This is the basic mercantilist export model of growth pursued by Germany, Japan, South Korea, China et al.: growth and value are created by generating surplus goods and services, and exporting those to other nations.

In sum: Country A has stuff it has to sell to other countries to keep its economy from spiraling into depression.It can demand whatever it wants: gold, moon dust, etc., but it is not in the driver’s seat: it has no alternative to dumping its surplus in whatever markets will take it. Managing its exports boils down to getting the best deal possible, but saying “no” is not an option.

There is little demand for Country A’s currency, as what it is trading isn’t currency, it’s stuff: it trades its surplus production (stuff) for somebody else’s currency.

Country B has a something called “the world’s reserve currency” which is a fancy name for paper money that is universally recognized as a placeholder of value that can be traded everywhere from Burma (pristine $100  bills preferred) to Bolivia (cocaine-laced $100 bills OK) and accepted without question (even counterfeit bills are OK as long as they’re the high-quality North Korean counterfeits). Let’s call Country B’s currency the doru.

Country B has exports, but its demand for imports far exceeds the value of its exports.  For all imports over and above the value of its exports, it exchanges its paper money for the imported real goods and services.

Country C has no reserve currency and no gold-backed currency. It has paper money which it can print in unlimited quantities. Country C has exports, but its demand for imports far exceeds the value of its exports.  For all imports over and above the value of its exports, it exchanges its paper money for the imported real goods and services.

Country C has a tricky problem.  Since its paper money has no intrinsic value, the only value it can possibly have is scarcity value: the supply must be strictly limited so that exporting nations will accept County C’s currency (let’s call them quatloos)in exchange for  tangible goods like oil and iPads.

In effect, Country C is asking exporters to accept a premium on the intrinsically worthless paper, a premium “earned” by scarcity: if there are relatively few quatloos floating around the world, then quatloos may well retain some scarcity value, even though their value based on other factors is basically zero.

The best way for Country C to finance its import trade  is to exchange its intrinsically worthless  quatloos for “the world’s reserve currency,” the doru, which is accepted everywhere.

Some would argue that Country C should buy gold with its quatloos, and that would certainly be an excellent trade: worthless paper for gold. But in terms of trade, shipping gold about is hazardous and costly: every nation engaged in trade needs an electronically traded currency that can be transferred, loaned, borrowed and so on, all in the blink of an eye.

Gold is a reliable store of value but it is a cumbersome means of exchange, especially globally.

Furthermore, gold’s value in currency or other goods has a history of fluctuating wildly.   Those managing quatloos could easily get burned, as the trade they’re really managing is quatloos to gold to the reserve currency which can actually be traded globally for goods  and services.

Any such commodity-based transactional chain is rife with risk from geopolitics and speculation. From the managers of the quatloo’s perspective, the easiest way to lower risk is to cut out the middle step of buying and selling gold, and just buy the reserve currency (the doru) directly.

All this works until Country C succumbs to the temptation to print money to the point it is in surplus rather than scarcity.And what a temptation it is, to “increase our wealth” magically by printing quatloos.

But exporters, forced by circumstance to constantly assess the tradable value of all  currencies they trade goods for, will quickly detect that the scarcity value of the quatloo–it’s only real value–has rapidly declined.

The cost of imports priced in quatloos in Country C shoots up as quatloos lose scarcity value, and the residents of Country C find they can no longer afford to buy imports.  The sales of imports collapses down to match Country C’s exports.

These are the key dynamics of trade and currency valuation.Now let’s consider Country B, owner of “the world’s reserve currency,” the doru.

Superficially, it might seem that the only value in dorus is also their scarcity value, and since Country B prints/creates large quantities of dorus every year, many observers make theunderstandable mistake of claiming the value of the doru should be zero, since it is has little to no scarcity value.

But the value of “the world’s reserve currency” is not simply a matter of scarcity, as it is for other lesser fiat (paper) currencies.One factor is the nature of scarcity is different for the doru and the quatloo: the quatloo has only one use in terms of global trade: the imports and exports of Country C.

Since Country C’s GDP is a thin sliver of global GDP, then demand for quatloos is limited to importers and tourists.

Compare that to “the world’s reserve currency,” which is in constant demand as a means of exchange in the entire $60 trillion global economy.

“The world’s reserve currency” (in our example, the doru) has another unique feature: everybody eventually needs to exchange quatloos and all other currencies for doru, because that is the only universally accepted means of global exchange.Sure, Country C and its cronies can set up an exchange which only accepts gold and quatloos, but as soon as they need wheat, electronics, and everything else the cronies don’t manufacture or harvest, then they will need to exchange the gold or quatloos for “the world’s reserve currency.”

As a result, the demand for doru (“the world’s reserve currency”) is stupendous and constant.Since currency is a commodity, albeit one with unique features, its ultimate value as a means of exchange is set by supply and demand. In other words, scarcity is not the only source of value: demand is the key driver of value of any commodity, good or service.

Let’s say that Country B’s economy is about 25% of global GDP.(In other words, like the U.S.) Let’s further assume that Country B prints/creates about 10% of its GDP every year in paper doru.

Now if Country C printed 10% of its GDP every year in newly issued quatloos, the supply of quatloos would quickly overwhelm demand for quatloos, and the value of quatloos globally would crash.

Country B doesn’t have that problem, because printing 10% of its GDP is a mere 2.5% of global GDP. Globally, the value of currencies exchanged daily exceeds 10% of Country B’s GDP and more or less matches the total value of doru in global trade.

In other words, the demand for exchangable, tradable currency–”the world’s reserve currency”– far exceeds the supply of doru. Printing doru, even in quantity, is like adding a glass of water to a bathtub: the supply increase is not even close to the daily demand.

How did Country B get the “the world’s reserve currency” instead of Country C?  Most importantly, there has to be enough of the currency to grease the tremendous flows of goods, services, loans and hedges globally: the tiny quantity of quatloos is completely inadequate to the task.

Second, the “the world’s reserve currency” must be relatively immune to increases in supply, i.e. money printing. For example, if global GDP is $60 trillion, and daily foreign-exchange trading is $2 trillion, then exactly how much impact can printing $1 trillion of “the world’s reserve currency” generate? The answer globally is very little.

The third factor is one which few commentators recognize, sometimes called “the hidden export:” global security.All financial transactions involve trust, some more than others. In terms of currency, the primary trust being offered and accepted is that the mechanics of the currency are transparent and thus so are the risks.

The secondary trust is that the value of the currency will remain stable over the short term, which is long enough for the vast majority of trading.

A third trust is in the stability of the issuing nation.  Once again, transparency is key: if that nation’s problems are well-known and transparent, then the risks of that currency can be easily and accurately assessed. If its institutions are robust and its trade flows gigantic, then people recognize it’s a safer bet to hold dorus than quatloos.

The key mechanism for creating surplus value in advanced Capitalism is trade, and the key mechanism for enabling that trade is a “reserve currency” of sufficient quantity and stability.The Chinese renminbi is a proxy for the U.S. dollar, the euro is unraveling, and the yen is not expansive enough to fund global trade and currency flows.

Envy is a key human trait, and the envy of all those who don’t hold/print “the world’s reserve currency” is understandable.  But you can’t create “the world’s reserve currency” like some other paper money, as paper money only has two sources of value: demand and trust.

As Jesse of the always-valuable Jesse’s Cafe Americainrecently wrote (and I paraphrase), people  often offer reasons why certain things that have happened could not happen. Conversely, they also often offer reasons why things that can’t happen should happen.

At some point the trade imbalance of $600 billion a year between the mercantilist nations and the U.S. will go away, as will the notion that printing paper money is creating wealth, and debts that are unpayable will magically be paid instead of being liquidated or repudiated. The point here is that the Status Quo of all the major trading nations is committed to conserving the present system of fraying imbalances, as their own wealth and power flow from this shaky, unsustainable structure.

Charles Hugh Smith – Of Two Minds

Here’s how it all can come apart, and why Congress – and Obama – are both on the wrong track.

Note this story from Bloomberg:

Political wrangling over a plan to reduce the deficit may cost the U.S. its AAA rating, adding $100 billion a year to government costs while dragging down economic growth, according to Wall Street bond dealers.

A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the “medium term,” JPMorgan Chase & Co.’s Terry Belton said today on a conference call hosted by the Securities Industry and Financial Markets Association.

But that’s just the start, you see.

Right now rates are at historic lows.  So let’s presume that the economy “improves”; if that happens then rates go up.  In fact, there was a hearing this afternoon in the House Banking Subcommittee talking about exactly that.

Here’s the current Treasury MTS; it shows total interest on the public debt last year was $355 billion, and this year thus far is $386 billion. This implies (on a grossed-up 8/12ths basis) that the blended interest rate on the debt is running about 4%.

Here’s the problem, in short: Rates have nowhere to go but up.

So is 70 basis points “realistic”?  No.  If the economy improves, they’ll go up double that or more just on their own on the short end. Then you get to add this “penalty” from the downgrade.

We have the government claiming they will “cut” about $1 trillion in real spending (the rest is gimmicks – the wind-down of the wars that were going to happen anyway) over the next ten years.

But if the economy improves the increased cost of the interest on the existing debt will be double that over the same ten years, and if we get downgraded you can double that again!

Each 100 basis points on $15 trillion in debt is $150 billion a year – every year – and the CBO says we’ll have $25 trillion in debt by 2020.

At a 5% blended interest rate this load on that $25 trillion will come to $1.25 trillion in interest annually – just 1 percent higher in interest than we’re paying now!

We will not get to 2020 folks; this is, in fact, exactly how the death spiral happens.

Interest expense as a percentage of government, this year, if the MTS thus far is 8/12ths of the total (through June), will run $579 billion.  This out of a budget of $3.8 trillion (approximately) is ~15% of the total federal budget.  To put this in perspective this is about 50% of the total receipts under federal income tax – just to pay interest!

Now I’m probably being pessimistic, because there’s a roughly $80 billion “whack” that comes from semi-annual coupon payments in the trust funds, and we’ve already gotten both of those.  So let’s be nice and call the trust fund interest accrued already, which means we now get $280 + $199, or $479ish, which is about 12% of the budget.

And that assumes that neither interest rates go up due to an improving economy or a downgrade.

What happens if that 4% blended rate goes up 70 basis points on a downgrade?  Oh that’s easy – just multiply that number by 117% and you’re close enough.  Call that $560, or ~$80 billion a year more.  Each and every year for the next ten, that’s $800 billion.

The problem is that the downgrade cannot be avoided without an actual credible $4 trillion in actual reductions in the deficit from the baseline. This means you can’t count anything that was already expected to happen like the wars being wound down.

It also means at least $400 billion in actual spending reductions for FY 2012 and then $400 billion more in each of the next three to four years! Or we can just do it in two – $750 now and $750 in FY2013.

We might get away with either of those plans, although the impact on the economy will be very significant – the exposure of the Depression we have been in since 2008 will occur with certainty.  GDP will contract and coverage – that is, the percentage of federal income that goes to interest – will actually go up for a while rather than down! It has to because as the economy adjusts to the lack of deficit spending GDP will contract and tax revenue will fall.

It is, in fact, precisely this inescapable mathematical reality that means that we must deal with this now rather than attempting to kick the can and have the market make these choices for us.

The outcome of taking our medicine will be bad.  Very bad.

But if we don’t do it – and do it now – it’s going to be worse.

Much worse.

Do you ever have the feeling that there are holes in your pockets?  These days our money seems to slip through our hands faster than ever.  The Federal Reserve keeps telling us that the rate of inflation in 2011 is “close to zero”, and this is causing confusion for many Americans because they are making just as much money as they did in previous years but it doesn’t seem to go nearly as far.  So what in the world is going on out there?  Well, sadly, the truth is that we really don’t even know what the government considers “inflation” to be anymore.  The way that the U.S. government calculates inflation has changed an astounding 24 times since 1978.  You see, it is always politically beneficial to have a low inflation rate, so recent administrations have been changing the formula constantly in an attempt to look good.  But these days most Americans know something is up.  All they have to do is stop at a gas station, go shopping for food or open up their bills. The reality is that inflation in 2011 is about as bad as we saw back in the 1970s, it is just that the government is much less honest about it now.

Many years ago Kenny Rogers released a song that contained the following lyrics….

You got to know when to hold em, know when to fold em
Know when to walk away and know when to run
You never count your money when you’re sitting at the table
There’ll be time for counting when the dealer’s done

Well, the U.S. middle class has been dealt a losing hand, but in the game of life you just can’t fold.

Over the past 3 decades, the average household income for the bottom 80 percent of Americans has been remarkably flat.  In fact, over the past several years we have actually seen median household income decline several times. If you do not know about how the U.S. middle class is being ripped to shreds, just read this article.  Without a doubt, America is getting poorer.

Well, not the top 1 percent, but the vast majority of the rest of us sure are.

Meanwhile, prices have started to rise with a vengeance.

According to an article in the Daily Mail, a Memorial Day cookout will cost you 29 percent more this year than it did last year.

That doesn’t sound good.

Will it be 29 percent more expensive again next year?

Perhaps some of us will just have to stop having Memorial Day cookouts because we can’t afford them anymore.

The price of gas is also digging into our paychecks big time.

A gallon of gas costs about a dollar more than it did a year ago, but we can’t avoid buying gas.  All of us have got to get to work and drive to the store.

Sadly, each time the price of gasoline goes up 50 cents it takes about $70 billion out of the U.S. economy (on a yearly basis).

A recent article in USA Today described the kind of impact these high gas prices are having on average American families….

For every $10 the typical household earns before taxes, almost a full dollar now goes toward gas, a 40 percent bigger bite than normal.

 Households spent an average of $369 on gas last month. In April 2009, they spent just $201.

But don’t worry, according to Ben Bernanke we barely have any inflation at all in 2011.

Some companies are trying to avoid raising their prices by reducing their package sizes.  A recent article posted on Marketwatch entitled “Inflation diet: same price, less product” explored this phenomenon in detail.  Millions of Americans are going to the supermarket and are finding that many of their favorite products are now 10 or 20 percent smaller and yet they are paying the same price as before.

Another thing that is happening is that product quality is going down.  Have you noticed how things just don’t seem to be made the way that they used to?  This is not a coincidence.

According a recent article on CNBC, retailers are skimping on quality as a way to deal with rising costs….

According to Global Hunter Securities Macro and Consumer Strategist Richard Hastings, retailers have been collaborating with their production contractors for about two years. They are trying to push back on the total volume, cost and weight of every unit.

“Along the way, the consumer barely noticed. By now, everybody knows something is wrong,” said Hastings. “If we had to put a number on it, it’s probably a 7.5% decline in total quality and durability of products compared to a bigger increase in the cost of production per unit made outside of the U.S.”

But no matter how hard companies try to hide it, at some point the American people are going to wake up and they are going to realize that they aren’t getting as much for their money as they were before.

This is why so many people get upset when the Federal Reserve and the U.S. government devalue our money.  Inflation is a “hidden tax” on every single one of us.  When our dollars don’t buy as much stuff, that means that we are all poorer than we were before.

All of this inflation is coming at a time when the economy is really struggling.  Personally, I am seeing all kinds of signals that the economy is really starting to slow down once again.

What is going to make things even worse is all of the government austerity that is going to be implemented over the next couple of years.

Once upon a time, a government job was the safest kind of a job you could have.  Sadly, as a recent Reuters article noted, those days are long gone….

Around 450,000 people who work for U.S. states, counties, cities, towns and villages could get pink slips in fiscal 2012, sharply up from the 300,000 positions shed this year, a report said on Monday.

So should we, as many of our liberal friends insist, tax the rich so that we can pay for all of those government workers?

Well, the truth is that the wealthy are already being taxed into oblivion.  If you doubt this, just read this editorial in The Wall Street Journal: “A 62% Top Tax Rate?”

Most of the “ultra-wealthy” have learned how to avoid most of this taxation by moving their wealth offshore.  In fact, as I have written about previously, it is estimated that a third of all the wealth in the world is now held in “offshore” tax havens.

So why are we seeing so much inflation right now?

Well, I covered that in my previous article entitled “When Faith In U.S. Dollars And U.S. Debt Is Dead The Game Is Over – And That Day Is Closer Than You May Think“.

The Federal Reserve and our politicians in Washington D.C. have been very naughty.  They have been systematically destroying the value of our dollars.

Someday when you are using your money as toilet paper because toilet paper is actually much more valuable than dollars are you will wish that the American people had stood up and insisted on a different path.

Don’t laugh – during the hyperinflation that the Weimar Republic experienced in the 1920s, German citizens were actually burning stacks of money in their furnaces in order to keep their homes warm.

100 years ago, a U.S. dollar had more than 20 times the purchasing power than it has today.

Sadly, we are now in a terminal phase of dollar devaluation.  It is only going to get worse from here.  Someday we will look back and long for the days of “low inflation” that we had back in 2011.

The Economic Collapse

You got a 20% debasement (roughly) in the currency, a 20% increase in the stock market (net zero) but look at what went for a rocket ride…. just all the things you need to buy….

QE2 and Bernanke: FAIL

The Market-Ticker

“You see in this world there’s two kinds of people, my friend. Those with loaded guns, and those who dig. You dig.” -  Blondie – The Good, the Bad and the Ugly

“There are two kinds of people in the world, my friend. Those who have a rope around their neck and those who have the job of doing the cutting.” – Tuco – The Good, the Bad and the Ugly

The economic peril that we find ourselves confronted with, has been ninety-eight years in the making. The confluence of debt, demographics, delusion, and denial has left the country at the precipice of annihilation. There are two kinds of people in the world, those who control the money and those that are controlled by those who control the money. The last century has been marked by a methodical looting of the good (working middle class) by the bad (Federal Reserve & bankers) and supported by the ugly (Washington D.C. politicians). When historians pinpoint the year in which the Great American Empire began its downward spiral they will conclude that year to be 1913. In this dark year for the Republic, slimy politicians, at the behest of the biggest bankers in the country, created a private central bank that has since controlled the currency of the United States. This same Congress staked their claim as the most damaging group of politicians in US history by passing the personal income tax in the same year. These two acts unleashed the two headed monster of inflation and taxation on the American people.

The government began keeping official track of inflation in 1913, the year the Federal Reserve was created. The CPI on January 1, 1914 was 10.0. The CPI on January 1, 2011 was 220.2. This means that a man’s suit that cost $10 in 1913 would cost $220 today, a 2,172% increase in ninety-eight years. This is a 95.6% loss in purchasing power of the dollar.  The average American does not understand the insidious nature of central bank created inflation. It makes you think you are wealthier while you are driven into abject poverty. The Federal Reserve and politicians have pulled the wool over your eyes. The CPI was 30.9 in 1964. Today, it is 223.5. This means prices have risen 723% since 1964. The only problem is your wages have not risen at the same rate, even using the government manipulated CPI. Using a true CPI figure, average weekly earnings are 64% below what they were in 1964. This explains why a family of five could live well with one parent working in 1964, but even with both parents working and accumulating debt in prodigious amounts, the average family cannot live as well today.

It is not a coincidence that the percentage of the working age population employed bottomed in 1964 at 59%. The participation rate rose steadily for the next thirty six years, topping out in 2000 at 67.1%. The employment to population ratio also bottomed at 55% in 1964. It rose to 64.4% by 2000. It seems that future historians will mark the year 2000 as the peak of the American Empire. Apologists for the Federal Reserve and politicians who have steered this country since 1964 would argue the increase in the percentage of the population working was a positive development. Nothing could be further from the truth.

The American middle class was forced to send both parents into the workforce just to keep up with the ever declining real weekly earnings. The Federal Reserve created inflation has methodically destroyed the American dream for the middle class. As both parents had to go into the workforce, American children were left to fend for themselves or be raised by strangers in daycare centers. The pressure of trying to keep up with inflation strained families to the breaking point. The number of divorces per thousand marriages was 10 in the early 1960s. It more than doubled to 22.6 by 1980 and still resides at 17 today. There are many factors for the disintegration of the traditional family unit, but the financial strain on families to maintain a consistent standard of living due to relentless inflation has been a key factor.

From the founding of our country there had been constant conflict between corrupt bankers trying to control the currency of the nation to further their own enrichment at the expense of the people and a few courageous leaders willing to fight them. The bankers won the century old battle in 1913. 

Den of Vipers & Thieves

“I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank…You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, I will rout you out.” - Andrew Jackson

The First Bank of the United States was created in 1791. Alexander Hamilton, the 1st Secretary of the Treasury, proposed this bank and convinced a hesitant President Washington to agree. John Adams and Thomas Jefferson were against the concept. It favored the moneyed classes of the North versus the agrarian South. The bank was given a 20 year charter and President James Madison let it expire in 1811. He understood the true nature of the banking interests:

“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance”.

Madison had to renew the charter in 1816 as the War of 1812 resulted in large government debts. Politicians always turn to bankers when funding wars and programs to get them re-elected. As usual, once unshackled, the bankers immediately caused a boom through their loose monetary policies. The Bank created a fake boom by 1818 through its reckless lending, which encouraged speculation in land. This lending allowed almost anyone to borrow money and speculate in land, sometimes doubling or even tripling the prices of land (remind you of another time in recent history?). In the summer of 1818, the national bank managers realized the bank’s massive over-extension, and instituted a policy of contraction and the calling in of loans. This recalling of loans simultaneously curtailed land sales and slowed the U.S. production boom due to the recovery of Europe. The result was the Panic of 1819. There was a wave of bankruptcies, bank failures, and bank runs; prices dropped and wide-scale urban unemployment struck the country. By 1819 many Americans did not have enough money to pay off their property loans. Do you see any difference between 1816 – 1819 and 2005 – 2011? Central banks don’t eliminate financial panics, they cause them. Booms and busts have always existed. They have become more common and extreme since the unleashing of greedy corrupt central bankers in the U.S., going back two centuries.

Andrew “Old Hickory” Jackson became President in 1829 and proceeded to declare war on the Second National Bank. He was the first and only President in U.S. history to pay off the National Debt. He worked tirelessly to rescind the charter of the Second Bank of the United States. His reasons for abolishing the bank were:

• It concentrated the nation’s financial strength in a single institution.
• It exposed the government to control by foreign interests.
• It served mainly to make the rich richer.
• It exercised too much control over members of Congress.
• It favored northeastern states over southern and western states.

President Jackson believed that only Congress should be responsible for the issuance and control of the currency. Delegating that duty to powerful New York bankers was distasteful to him:

“If Congress has the right to issue paper money, it was given to them to be used … and not to be delegated to individuals or corporations”

President Jackson vetoed the extension of their bank charter in 1832. He redirected government tax revenue to other state banks.  The Second Bank of the United States was left with little money and, in 1836, its charter expired and it turned into an ordinary bank. Five years later, the former Second Bank of the United States went bankrupt. Those who believe that a central bank is essential to economic progress need to examine the “free banking” period from 1837 to 1861. In the last five years of the Second Bank’s existence prices rose by 28%. Over the next 25 years, prices in the U.S. fell by 11%. We experienced the dreaded deflation. Did deflation destroy America? Not quite. GDP grew from $1.5 billion in 1836 to $4.6 billion in 1861. Deflation is only fatal to debtors. Inflation is the friend of lenders and the moneyed classes.

The American Civil War brought about the National Banking Act of 1863, which created a network of national banks. Politicians always need bankers to fight their wars and Abraham Lincoln was no different. By 1870 there were 1,638 national banks. This did not eliminate the booms and busts that punctuate human history, but the booms and busts were not scientifically created by a small cabal of bankers. With thousands of banks, those who made bad lending decisions failed. The economy withstood the periodic panics and continued to grow. The GDP of the U.S. grew from $7.6 billion in 1863 to $39 billion by 1913, with virtually no inflation. The Federal government ran surpluses or very small deficits during this entire time period. These facts refute the argument that a strong central bank was necessary to keep our economic system operating smoothly. It seems the Big Lie was not invented by the Nazis.

Creature from Jekyll Island – Control the Money, Control the Country

“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. No longer a government by free opinion, no longer a government by conviction and vote of majority, but a government by the opinion and duress of a small group of dominant men.” – President Woodrow Wilson

Any impartial assessment of inflation throughout the history of the United States confirms that from the beginning of our nation through the War of 1812, the Mexican American War, the Civil War, the Spanish American War and the Industrial Revolution, the country experienced virtually no inflation as bankers were kept from controlling the U.S. currency and our legal tender was backed by gold. The creation of the Federal Reserve in 1913 and the closing of the gold window by Richard Nixon in 1971 unleashed a tsunami of inflation that continues to inundate our country today, killing the once prosperous middle class.

The Rothschilds of London understood that a fiat currency system would benefit the few (bankers & politicians) who understood it and the masses would be too ignorant to understand they were being screwed:

“Those few who can understand the system (check book money and credit) will either be so interested in its profits, or so dependent on it favors, that there will be little opposition from that class, while on the other hand, the great body of people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear it burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”

The House of Rothschild had been the dominant banking family in Europe for two centuries. They were known for making fortunes during Panics and War. Some claimed they would cause Panics in order to take advantage of those who panicked. American bankers learned the lesson well. The Panic of 1907 was the used as the reason for creating the Federal Reserve. A small cabal of powerful U.S. banking interests understood that if they could control the currency of the U.S., they could control the country, its politicians, and its people.

In 1906, Frank Vanderlip, Vice President of the Rockefeller owned National City Bank, convinced many of New York’s banking establishment they needed a banker-controlled central bank that could serve the nation’s financial system. Up to that time, the House of Morgan had filled that role. JP Morgan had initiated previous panics in order to initiate stronger control over the banking system. Morgan initiated the Panic of 1907 by circulating rumors the Knickerbocker Bank and Trust Co. of America was going broke. There was a run on the banks creating a financial crisis which began to solidify support for a central banking system. During this panic Paul Warburg, a Rothschild associate, wrote an essay called “A Plan for a Modified Central Bank” which called for a Central Bank in which 50% would be owned by the government and 50% by the nation’s banks.

In November 1910 a secret conference took place on Jekyll Island off the coast of Georgia. Those in attendance were: JP Morgan, Paul Warburg, John D. Rockefeller, Bernard Baruch, Senator Nelson Aldrich, Colonel House, Frank Vanderlip, Benjamin Strong, Charles Norton, Jacob Schiff, and Henry Davison. From this meeting of the most powerful bankers and politicians in the country came the plan for a Central Bank. This conference was unknown until 1933. In 1935, Frank Vanderlip wrote in the Saturday Evening Post: “I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual conception of what eventually became the Federal Reserve System.”

Behind the scenes these powerful men were formulating the plan for a Federal Reserve System. There was no outcry from the public to implement this plan. The public knew nothing of this. The Aldrich Plan was renamed the Federal Reserve Act and pushed forward by Paul Warburg and Colonel House. Warburg essentially wrote the Act and pressured Congressmen to see his way or lose the next election. Colonel House, who had socialist leanings, was the top advisor to President Wilson.

The Glass Bill (the House version of the final Federal Reserve Act) had passed the House on September 18, 1913 by 287 to 85. On December 19, 1913, the Senate passed their version by a vote of 54-34. More than forty important differences in the House and Senate versions remained to be settled, and the opponents of the bill in both houses of Congress were led to believe that many weeks would elapse before the Conference bill would be taken up. The Congressmen prepared to leave Washington for the annual Christmas recess, assured that the Conference bill would not be brought up until the following year. The creators of the bill then pulled the ultimate swindle on the American public. In a single day, they ironed out all forty of the disputed passages in the bill and quickly brought it to a vote. On Monday, December 22, 1913, the bill was passed by the House 282-60 and the Senate 43-23. This meant that the single most important piece of legislation ever passed by the Senate was missing the votes of 26 Senators because it was passed during the Christmas recess. President Wilson, at the urging of Bernard Baruch, signed the bill on December 23, 1913.

The Road to Hell is Paved by Central Bankers

“Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen, they will create enough deposits, to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of Bankers, and pay the cost of your own slavery, let them continue to create deposits.” – Sir Josiah Stamp (President of the Bank of England in the 1920?s, the second richest man in Britain)

The results speak for themselves. The Federal Reserve has been in existence for ninety eight years and over that time the U.S. Dollar has lost 95.6% of its purchasing power. In other terms, the bankers who have controlled our currency since 1913 have generated 2,172% of inflation in just under a century. In the prior one hundred years, when the country was growing by leaps and bounds, there was virtually no inflation. I’m not sure the average person fully understands this concept. To put it in layman’s terms, something that cost $4.40 in 1913 will cost you $100 today. A pair of boys’ school shoes cost 98 cents in 1913. You could purchase three loaves of bread for 10 cents. You could purchase six rolls of toilet paper for 26 cents. The truly frightening impact on the American middle class has happened since Richard Nixon closed the gold window in 1971 and allowed the Federal Reserve to print money unfettered by consequences and slimy politicians to make irresponsible unfulfilled promises as bribes for votes. This chart should worry even the most ignorant of the masses.

Even with the proliferation of two worker households since 1971, household income has not come close to keeping up with the costs of daily living. The average American’s standard of living has declined dramatically over the last forty years and they don’t even know it. Americans have become the slaves of bankers and pay the cost of their own slavery through inflation and debt. It is not a coincidence that consumer debt, which was virtually non-existent prior to the 1960s, began to take off in the 1970s and went nearly parabolic from the early 1990s until the 2008 financial collapse. As the Federal Reserve and political class created inflation, which reduced your standard of living, the bankers who own the Federal Reserve and control the politicians used their slick marketing machine to convince you that acquiring goods using vast quantities of debt was just as good as buying things with cash you saved.

Who benefits from inflation and the issuance of trillions in debt to average Americans? Based upon the decades of gargantuan Wall Street profits, mammoth bonuses paid to bank executives, and fact that Washington politicians absconded with trillions from American taxpayers to save their Wall Street masters, it appears that bankers and politicians are the beneficiaries. A gutted, indebted, jobless, demoralized middle class were the recipients of the downside of inflation and debt. Without a Central Bank issuing a fiat currency, with no constraints, none of this could have happened.

The Federal Reserve is primarily responsible for the destruction of the American middle class. In 1915, according the Federal Reserve annual report, they operated with 35 total employees. Today, they operate with over 20,000 employees and the cost to operate the system exceeds $3.3 billion. The Federal Reserve has failed on every one of its stated mandates:

• It was created to stabilize the banking system and keep bank panics from occurring. Within sixteen years of its creation it caused the near collapse of the banking system and the Great Depression. The stagflation of the 1970s was caused by Fed policies. The Savings & Loan crisis was created by their policies. The internet bubble, housing bubble and eventual financial collapse were caused by Federal Reserve blunders. There have been 18 recessions since the creation of the Federal Reserve.
• The stable prices mandate has been a wretched failure, as the Fed has manufactured 2,171% of inflation and destroyed 96% of the currency’s purchasing power. This manufactured inflation has enabled the creation of our welfare/warfare state.  
• The Federal Reserve mandate of moderate long-term interest rates has clearly not been met. The Fed Funds Rate has plotted a path of extremes over the decades, ranging from 0% to 19%, not exactly stable. The Federal Reserve has consistently set rates too low, leading to credit bubbles, which always pop and end in recession or depression.
• The mandate of maximum employment has also been a miserable failure. The easy credit policy of the Federal Reserve during the 1920s led to the Great Depression with unemployment rates exceeding 20%. Unemployment has averaged between 5% and 15% consistently since the formation of the Federal Reserve. The true unemployment rate today exceeds 15%.
• The Federal Reserve was supposed to supervise and control the activities of banks. Instead, under Alan Greenspan and Ben Bernanke, they stepped aside and let banks take preposterous risks while giving an unspoken assurance that the Fed would clean up any messes they caused with their debt based enrichment schemes. This total dereliction of duty and gross regulatory negligence led the greatest financial collapse in history.

The American working middle class (Good) have been deceived by the Federal Reserve, the banks that control them (Bad) and the Washington DC political class (Ugly) into believing that a fiat currency, un-backed by gold, supported by systematic inflation is beneficial to their wealth. This has been the Big Lie for the last century and has positioned the country for an epic collapse. Presidential candidate Ron Paul has been the lone voice of sanity in Washington DC for the last two decades and his assessment of the Federal Reserve while questioning Ben Bernanke in 2009 needs to be understood by every American:

“The Federal Reserve in collaboration with the giant banks has created the greatest financial crisis the world has ever seen. The foolish notion that unlimited amounts of money and credit created out of thin air can provide sustainable economic growth has delivered this crisis to us. Instead of economic growth and stable prices, (The Fed) has given us a system of government and finance that now threatens the world financial and political institutions. Pursuing the same policy of excessive spending, debt expansion and monetary inflation can only compound the problems that prevent the required corrections. Doubling the money supply didn’t work, quadrupling it won’t work either. Buying up the bad debt of privileged institutions and dumping worthless assets on the American people is morally wrong and economically futile.”

I’ve now completed three parts of the five part series, documenting the downfall of the great American Empire. Part four, Outlaw Josey Wales, will scrutinize the looting of America by a small group of powerful, connected, super rich men lurking in the shadows, but pulling the strings on our puppet politicians. Lastly, Unforgiven  will detail the impending collapse of our economic system and the retribution that will be handed out to the guilty.

The smell of revolution is in the air.

The Burning Platform