weekend commentary - Hidden Bailout = $1 Trillion from 'Thin Air'
(snip)"As we all know, the large banks were in deep trouble in 2008 and 2009. The subprime mortgages were the trigger, but the problems rapidly spread into other investments. Markets totaling trillions of dollars were in danger of collapsing because of a lack of buyers.
Enter the Federal Reserve. This next part of the story is where 99% of the country usually stops reading. Because the concepts and vocabulary get a little obscure. That's what Wall Street is counting on - you not finishing this short article. Because that's the perfect way to steal by the trillions - do it in plain sight, but in such a manner that the people are blind to what you're doing. Keep reading, and let's shine a light on what has been done, and why you should be personally concerned.
Paying For The Hidden Bailout
What the Federal Reserve did was to intervene in the troubled markets on a historically unprecedented scale. The Fed bought close to a trillion dollars of securities, at 100 cents on the dollar, meaning that it quite deliberately overpaid, and covered what the banks' losses would have been if they had sold into a free market. Except, the Fed didn't have a spare trillion lying around, and neither did the US government, or anyone else. Which raises the question: where did that money come from?
The Federal Reserve came up with $819 billion to pay for the securities (and manipulate the markets for the benefit of the large banks) by creating what are known as "excess reserve balances" and giving these balances to the banks in exchange for the troubled investments. "Excess reserve balances" is a terribly obscure term, but what it translates to is cash. Freely spendable cash that didn't exist before, but once it is created is every bit as good as the dollars in your wallet or your checking account.
That's what a central bank like the Federal Reserve does, and what separates it from any other bank or corporation - it can create money at will. Usually, this is done indirectly through controlling bank lending and capital requirements. However, in time of need, the Fed can directly create money out of nothingness, without limit. For good reason, this power is rarely used, as it tends to end up destroying the value of the currency and wiping out the value of everyone's savings. Yet, this power is being exercised right now on a historically unprecedented scale, with little media or political scrutiny.
New Monetary Creation In Perspective
The numbers are so large that they may lose meaning, so let's place this new money in perspective. Total physical cash in circulation - all the $1, $20, $100 bills and so forth - was $775 billion as of June 2007. By creating $819 billion in excess reserve balances, and handing it to Wall Street and the major banks, the Fed directly created more new cash in less than two years than the total US physical cash in circulation after more than 230 years. If we take into account that about half of US physical dollars are believed to be held overseas, the Fed created 2 dollars in new cash for every existing physical dollar actually in the United States. Now, only a minority of total cash takes physical form these days, most is just electronic digits on bank computers, but the comparison is illuminating nonetheless.
Here is some more perspective: total United States individual income taxes were $809 billion in 2004. In other words, more money was spent to cash out Wall Street and major banks under highly favorable terms, than total annual individual income taxes collected just six years ago. All without raising taxes or appearing in the Federal Budget. The real bailout for Wall Street never was what you saw in the headlines; it was what you didn't see that mattered.
These large numbers are perhaps still difficult to grasp, so let's make it personal. According to the Census Bureau, there are approximately 111 million households in the United States. Divide $819 billion in new "excess reserve balances" by 111 million households, and that's $7,400 per household. In other words, your family's share of the new cash would have been enough to buy a used car.
Total Federal Reserve assets ballooned from $800 billion in 2007 to $2.1 trillion in assets today, an increase of $1.3 trillion. Effectively, this is another half trillion in new money on top of the $819 billion increase in "excess reserve balances", created through a variety of equally obscure mechanisms. When we move our per household comparison to the full $1.3 trillion increase in the Federal Reserve's balance sheet, that works out to about $12,000 per family. The car in the driveway that each of our families just "bought" goes from used to new, albeit a new subcompact.
If we add everything in, including the official government bailout, stimulus package and most importantly, the far larger Federal Reserve commitments to create new cash out of thin air in the future as needed, then total commitments to support Wall Street work out to $13 trillion, or $165,000 per household. Forget the car, this is enough money to buy a house! (The average cost of a house in the United States was $169,000 in the first quarter of 2009).
So, what the Federal Reserve commitments are effectively doing is placing enough money either currently into circulation (or committed to be in circulation if needed), to equal the value of a new home for every American household. Except of course the American households don't actually get those new homes. Instead, the money goes to the benefit of the large banks.
Now, here's the difference between the Federal Reserve bailout and the US Government bailout. You didn't pay a dime in taxes for the used car, the new car, or the Federal Reserve's share of the phantom house, nor were any new Treasury bonds issued to cover deficit spending. The new money just came into existence. However, the size of the economy didn't change. So if enough new cash has been created to buy every family in America a car - but there aren't any actual cars, just the new money, what happens to the value our savings and retirement investments? The clear risk is a precipitous plunge in the value of our money.
That's why the Federal Reserve hasn't used this free money system before, at least not anywhere on the current scale. Taxes take some of our money. The government creating money in lieu of taxes takes the value of our money, and has historically led to the destruction of the value of currencies when governments have taken these desperate measures in the past. There is no such thing as free money, and it is the nation's savers, and particularly retirement investors, who are bearing the risk of the hidden bailout of Wall Street.
There's another big difference between the official bailout, and the larger real bailout. The official bailout involved some losses, and loans to be repaid. The Federal Reserve bailout prevented the losses from occurring in the first place. So there were no losses, no reduction in bonuses and no loans to be repaid. There was just a simple transfer of risk on the troubled investments from Wall Street to us. With that transfer of investment risk being doubled by risking the value of all of our savings to fund the purchase with newly created cash. Twice the risk for you and I, with our taking both investment risk and inflation risk, and all the benefits of creating this artificial market quietly going to Wall Street bonus pools.
So if all this new money has been created, why hasn't inflation skyrocketed yet? Using the Federal Reserve Chairman's own speeches, we'll cover that in the next article, as we also take a closer look at the real source of the $45 billion 2009 Fed "profit". Here's the bottom line preview: we take even more risk, Wall Street gets even more rewards."(snip)
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Re: weekend commentary - Hidden Bailout = $1 Trillion from 'Thin Air'
"So if all this new money has been created, why hasn't inflation skyrocketed yet?"
I've been wondering this for months. I've also been wondering whether anyone remembers post WWI Germany.
Edited to add:
Ron Paul mentions a great deal about this in "End the Fed." Have you read it?
http://www.cnbc.com/id/32881898
Re: weekend commentary - Hidden Bailout = $1 Trillion from 'Thin Air'
^^^ yes re 'End the Fed'. However I am reluctant to comment on that particular topic in Dollar Den because of the vast political overtones.
Quote:
I've also been wondering whether anyone remembers post WWI Germany.
In terms of actual personal memories, people with actual recollections are now nearing 100 years old. Of course the 'gold foil hat' crowd would argue that this generational loss of personal memory / impact is exactly what permits severe inflation / depression cycles to repeat every 2 generations or so. ...
http://upload.wikimedia.org/wikipedi...f_Wave.svg.png
Re: weekend commentary - Hidden Bailout = $1 Trillion from 'Thin Air'
Quote:
Originally Posted by
SalsaDancer
"So if all this new money has been created, why hasn't inflation skyrocketed yet?"
I've been wondering this for months. I've also been wondering whether anyone remembers post WWI Germany.
Not that you would know it from reading the perma-bear's posts, but the reason inflation has not skyrocketed yet is there is no inflationary pressure in the economy. Of greater concern is the deflationary pressure in the economy, which the perma-bear and her acolytes conveniently ignore. I do not mean that Obama has not dealt himself a very poor hand with all the entitlement programs he wants to grow and the healthcare entitlement he wants to create. He has. With the increase in debt and commitments of the Federal government, there is a long term inflation risk. But, short term, there is zero inflation risk. Unemployment is too high, and industrial activity is too low for inflation to be a problem.
HTH
Z
Re: weekend commentary - Hidden Bailout = $1 Trillion from 'Thin Air'
^^^ it is true that 'overall' risks of US dollar inflation in the short term are still low. However, this is arguably the result of significant deflation in the pricing of non-essential items ( like large screen TV's, new cars, appliances, etc.) averaging out against significant inflation in the pricing of essential items ( like energy, food, health care ). While a bit dated, the following clearly illustrates the price increases for essential items versus 'official' statistics ...
(snip)Inflation Factoids
Medical Costs
Employee medical care costs were up over 5 percent in 2006 and over 10 percent in 2007. Individual health care coverage can cost $400 to $700 per month, and family coverage can cost $800 to $1,500 per month. The cost of health care has risen far faster than the published rate of inflation for the last 10 years. Rapidly rising and very expensive health care receives constant media attention.
Yet. The BLS claims these costs are up less than 5 percent.
Should we re-examine how health care inflation is calculated?
Food Prices
It would sure be nice to know where the BLS does its food shopping. They must get one heck of a discount. There appears to be a total disconnect between the food costs claimed by the BLS versus what consumers are really paying for food. From September 2006 through September 2007, commodity prices for corn went up ~43%, soybeans went up ~46%, wheat went up ~62%, milk went up ~64%, oats went up ~12%, and so on. But the BLS claims food and beverage prices only went up 4.4% during this same timeframe.
Huh? Does the BLS data make any sense? How long does it take for higher commodity prices to work their way through the food chain?(snip)
(snip)Fuel Prices
The BLS reported motor fuel prices went up 8.6% from September 2006 to September 2007. Household energy prices (natural gas, fuel oil, propane, electricity, etc.) went up 1.8% during this same timeframe. How can this be true? According to the Energy Information Administration (EIA), oil prices went up 10.7%, propane went up 5.5%, gasoline went up 9.2%, diesel fuel went up 6.1%, heating oil went up 10.4%, natural gas went up .2%, and electricity went up 1% during this period. Although the BLS motor fuel price increases appear reasonable, average home fuel costs actually went up ~ 3.3%, not 1.8%.(snip)
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Unfortunately, as unemployed Americans see their paychecks exchanged for unemployment checks, and as employed Americans see their take home paychecks shrink as a result of higher state and local tax rates, they have less money available for spending on non-essential items while they are forced to divert a greater and greater percentage of their budget towards essential items. This is the obvious driving force for falling prices of non-essential items ( i.e. reduction in 'real world' demand for those non-essential items). However, their demand for essential items persists ... as do pricing levels for those essential items.
Re: weekend commentary - Hidden Bailout = $1 Trillion from 'Thin Air'
Also, everyone is free to believe whatever they want in regard to mainstream media economic reports and forecasts. However, history also has a funny way of repeating itself ...
Thursday, January 29, 1931: Dow 166.84 -3.98 (2.3%)
(snip)"Broad Street Gossip: Street veterans note successful traders always keep in mind there are two sides to the market; in 1929 many traders forgot stocks could go down, while until recently many bears had forgotten they could go up. An Exchange floor specialist is only doing commission business and has foresworn trading until he learns how to take a loss and give up his "mania for holding." One banker feels the decline in public buying power is overstated; in a good year, total income in the US is about $85B; even if this is off 25%, it still is large at $65B, while the amount that can be bought with that money is in many cases more than 25% higher than in 1929 due to price declines.
Business leaders remain cautious in spite of the stronger stock market. Feel satisfactory economic progress has been made since start of the year, though pace has been moderate, but await developments in coming months before taking definitely optimistic stand; recall "spurt of greater proportions petered out a year ago."
J. Darling, Midland Bank dir., attributes world economic crisis to decline in silver, reducing buying power of half the world; suggests raising silver price by, in effect, backing it with gold.
Russell, Miller & Co. see talk of a new high in the industrials as premature; "It is difficult ... to support a sustained rally which has behind it mainly technical strength, and lacks the basis of a sound and strongly improving business situation."
W. Chrysler sees definite "very distinct change in the mental attitude of the buying public"; sees business following a slightly upward trend from now on, becoming more apparent in spring, and return to normal level in 1932."(snip)