Ponzi Scheme for Dummies (And Community Organizers)

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SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Ponzi Scheme for Dummies (And Community Organizers)

15 April 2009

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
.


http://jessescrossroadscafe.blogspot.com/2009/04/this-is-your-economy-on...

joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
Re: Ponzi Scheme for Dummies (And Community Organizers)

does anyone out there (hint.......jason)

think this might be a little over the top and somewhat disrespectful of the office of the presidency.

it also might be a turnoff to someone coming to this site for the first time. we are after all trying to include everyone and not exclude anyone. consensus is important and we need to get as many people on board as possible.alot of people voted for obama and a lot of democrats might just wander in here

i think the article is ok but maybe the graphic is a little much.................how  does anyone else feel?

SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Ponzi Scheme for Dummies (And Community Organizers)

Geez, Joe. I voted for the man. I seriously doubt anyone would take offense - including Obama.

Jarhett's picture
Jarhett
Status: Silver Member (Offline)
Joined: Nov 21 2008
Posts: 132
Re: Ponzi Scheme for Dummies (And Community Organizers)

I thought Joe would have riked this article.

SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Ponzi Scheme for Dummies (And Community Organizers)

Sealed

ckessel's picture
ckessel
Status: Martenson Brigade Member (Offline)
Joined: Nov 12 2008
Posts: 479
Re: Ponzi Scheme for Dummies (And Community Organizers)
joe2baba wrote:

does anyone out there (hint.......jason)

think this might be a little over the top and somewhat disrespectful of the office of the presidency.

it also might be a turnoff to someone coming to this site for the first time. we are after all trying to include everyone and not exclude anyone. consensus is important and we need to get as many people on board as possible.alot of people voted for obama and a lot of democrats might just wander in here

i think the article is ok but maybe the graphic is a little much.................how  does anyone else feel?

I think it is right on the mark. It is also has good humor! I vote that Sam should carry the torch forward!

Coop

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