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The Shell Game - How the Federal Reserve is Monetizing Debt

Monday, August 3, 2009, 11:23 AM

There's a new Martenson Report available for enrolled members.

The Shell Game: How the Federal Reserve is Monetizing Debt

A snippet:

This report will wade through some technical details in order to illuminate a complicated issue, but you should take the time to learn about this because it is essential to understanding what the future may hold. 

One of the most important questions of the day concerns how the dollar will fare in the coming months and years. If you are working for a wage, it is essential to know whether you should save or spend that money.  If you have assets to protect, where you place those monies is vitally important and could make the difference between a relatively pleasant future and a difficult one.  If you have any interest at all in where interest rates and the dollar are porobably headed, you'll want to understand this story.

There are three major tripwires strung across our landscape, any of which could rather suddenly change the game, if triggered.  One is a sudden rush into material goods and commodities, that might occur if (or when) the truly wealthy ever catch on that paper wealth is a doomed concept.  A second would occur if (or when) the largest and most dangerous bubble of them all, government debt, finally bursts.  And the third concerns the dollar itself.

In this report, we will explore the relationship between those last two tripwires, government debt and the dollar.

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13 Comments

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Re: The Shell Game - How the Federal Reserve is Monetizing ...

I have not read this article yet, but the title and introduction provoked a physical response much like when I am presented with a plate of very fresh and spicy putanesca. 

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: The Shell Game - How the Federal Reserve is Monetizing ...

Dr.M or Patrick (or anyone else),

Can you give me a "real world definition" of Agency debt? This is one of the many things that I have no clue about. Thanks in advanced...Jeff

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5727
"Agency Debt"

Agency debt refers to the various market products offered mainly by Fannie Mae or Freddie Mac (and other government sponsored entities as well, but at vastly lower volumes).

Definition

A bond, issued by a U.S. government-sponsored agency. The offerings of these agencies are backed by the U.S. government, but not guaranteed by the government since the agencies are private entities.

Such agencies have been set up in order to allow certain groups of people to access low cost financing, especially students and first-time home buyers.

Some prominent issuers of agency bonds are Student Loan Marketing Association (Sallie Mae), Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac).

Agency bonds are usually exempt from state and local taxes, but not federal tax.

The 'offerings' could be either mortgage backed securities (MBS) or plain old bonds issued to raise cash.  They are the debts and obligations of the issuing agencies.

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Re: The Shell Game - How the Federal Reserve is Monetizing ...

Jag,

Just like it sounds . . . a bond issued by a US agency as opposed to the Treasury itself.  Think Fannie and Freddie.

Nichoman's picture
Nichoman
Status: Gold Member (Offline)
Joined: Nov 1 2008
Posts: 422
Re: The Shell Game - How the Federal Reserve is Monetizing ...

So if were essentially following the same path as Zimbabwe.   Can we expand and/or project the timing of this based on past events?

 

Nichoman

CB's picture
CB
Status: Gold Member (Offline)
Joined: Mar 18 2008
Posts: 365
Re: The Shell Game - How the Federal Reserve is Monetizing ...

The US is not Zimbabwe. The special status of the dollar in international finance, the power of US and European central banks and the FIRE corporations, the US military umbrella, these all mitigate against easy analysis and prediction. The desire, and power, to stave off radical change is very strong and it is my belief that unpredictable interactions will dictate how this all unfolds. We can see the cliff approaching, but when and how the inevitable changes will play out is unknowable in my view. The past is a guide, but the world is in new territory - fasten your seatbelts.

affert's picture
affert
Status: Silver Member (Offline)
Joined: Sep 22 2008
Posts: 100
Re: The Shell Game - How the Federal Reserve is Monetizing ...
CB wrote:

... it is my belief that unpredictable interactions will dictate how this all unfolds. We can see the cliff approaching, but when and how the inevitable changes will play out is unknowable in my view...

 

That is a great way to sum up what I've been trying to think for a while now.

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
Re: The Shell Game - How the Federal Reserve is Monetizing ...

Chris,

This is some impressive detective work and analysis.  I've been wondering lately about this exact question (what's happening behind the Treasury auction scenes), and I believe you've let the cat out of the bag!  It reveals how frantic US officials are in their attempt to stem the crisis and how desperate they are (perhaps with good reason) to prevent panic from ensuing.

 

 

Headless's picture
Headless
Status: Gold Member (Offline)
Joined: Oct 28 2008
Posts: 363
Re: The Shell Game - How the Federal Reserve is Monetizing ...

Chris et al,

If fireside (and wine enhanced) musing upon possible outcomes  were acceptable, I "ponder" in your direction--as Palin  might "progress the economy"--a couple of questions from a non-subscriber, if you will:

1. If you had to guess (which, I know, you are not in the business of doing), what the devaluated-dollar price of gasoline will be  by Christmas 2010? (Will the season still be "merry?" or will the U.S. have become Zimbabwe North?)

2. Do you think that this continuation of Greenspan's stealing of the world--were Government Sachs able to pull this latest monetization charade off--be met with less than an eventual World War? (How much will exploited populations (or their anti-imperialist leaders) take before they "pull the trigger?")

3. The pros and cons of Mexico as number 51?--or number 58, a la Obama: 

 (I know. Seems completely unrelated, but IMO, it's quite an interesting "solution?")

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: The Shell Game - How the Federal Reserve is Monetizing ...

Chris: Fantastic report, chief! One of the best yet, IMHO.

But you left out one critical thing: What do you think this clandestine scheme means to treasury bond yields? One argument is that because this is such a scam, the yields have to explode sooner or later, probably sooner as bond prices collapse when the market at large figures out the scam.

But the counter-argument is that for the moment the Fed is succeeding at keeping its balance sheet out of public view, and this shell game scam of theirs seems to be working quite well for them. So one might posit that they have a strong manipulative hold on the market, at least for now, and will presumably keep long bond prices propped up artificially for some time to come, putting the shorts (like yours truly) out of business.

Any specific thoughts on the impications of the shell game on treasury yields in the intermediate term?

Thanks,

Erik

 
 
SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
Joined: Feb 11 2009
Posts: 2237
Re: The Shell Game - How the Federal Reserve is Monetizing ...

 AWESOME detective work, Chris.  Sherlock Holmes ain't got nothin' on you.    Many thanks for illuminating this exceedingly murky corner of things...

Viva -- Sager

NMNJGRL's picture
NMNJGRL
Status: Member (Offline)
Joined: May 23 2009
Posts: 20
Re: The Shell Game - How the Federal Reserve is Monetizing ...

Unfortunately, I don't have access to the full CM article, but this is out there today...discussing a post at Zero Hedge that excerpts CM....it's bbout "disinformation" about the topic

 

http://www.nakedcapitalism.com/2009/08/monetizing-debt-disinformation-in...

Nichoman's picture
Nichoman
Status: Gold Member (Offline)
Joined: Nov 1 2008
Posts: 422
Re: FED In Buying Overdrive Today?

From Seeking Alpha:

 The Treasury sells a record $37B in 3-year notes at 1.78%. Bid-to-cover ratio was 2.89, compared with a recent average of 2.63; indirect bidders buy 62.5% compared with 54% in July and a recent average of 39.9%. Yields stayed down: The 30-year yield -0.06 at 4.47%; 10-year -0.07 at 3.7%; 5-year -0.07 to 2.68%; 2-year -0.04 to 1.2%.

Looks like "indirect bidders" (i.e. FED?) was quite busy today.  

 

Nichoman

 

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