first majestic silver

Welcome To Club Fed

August 23, 2013

During the in extremis phases, we analysts often referred to the Eurozone by its touristy moniker ‘Club Med’. Well we’ve got a much more serious club to deal with right here on our own shores. This is something I and many others have been pounding the keys about for quite some time and that is the less-than-transparent institution known here as the not-so-USFed. Its sins are grievous, numerous, and on the increase. Its hubris is unmatched in the annals of central banking. Its creation of bubbles is epic. Its self-ascribed ignorance of said bubbles is epochal. You’d think we were back in the 1630s in Holland dealing with tulips rather than the future of America. Sadly, many still don’t get it. Or maybe they do and don’t want to admit it.

The news that the central bank’s holdings of USTreasuries crossed the $2 trillion mark should be the biggest news story of the year so far. And that is just what they’re wiling to admit publicly. In all likelihood the holdings are much higher. Ironically, prior to the first phase of the ongoing financial crisis in 2008, the not-so-USFed owned ‘only’ $475.9 billion in USBonds.

What’s the big deal? I’m going to take a slightly different approach this time and debunk one of the biggest lies of all time, although we haven’t heard it used much recently. It was used back in the 1980s when the deficits really started to pile up and the national debt approached the $1T mark. The lie was ‘it is no big deal, we’re only borrowing from ourselves’. A very flimsy case could have been made for this argument in the instance of savings bonds that were purchased by US citizens. These bonds, much like their ancestor, the ‘war’ bond, were used to cajole citizens into giving over their savings to the government in return for some form of patriotic satisfaction and a nominal rate of interest.

In that case, the government was borrowing from the people. The problem with this concept is that, at some point, the government was expected to run a surplus with which the loans (bonds) could be satisfied. This obviously never happened. The debts just continued to get larger and larger, and even more ominously, much of the debt started being absorbed by external sources such as OPEC, Japan, and China. At that point, the argument that we were ‘borrowing from ourselves’ became completely fallacious.

However, it can and does get worse. Much of the misperception of individuals in this regard comes from the completely false notion that the federal reserve is an agency of the USGovt. It is not. This has been well-documented ad nauseum and we’re not going to go out and prove the case once again. The not-so-USFed is a private bank. A corporation. And corporations have one main legal and fiduciary objective and that is to increase shareholder value. Who exactly are the shareholders of the federal reserve? Its member banks. They hold the preferred shares of the federal reserve and receive a 6% per annum interest payment on those shares. If the bank were truly a government entity, as many falsely believe, then the USGovt, NOT member banks (which are private entities themselves) would own the shares. It is a very cozy setup and is wrought with conflicts of interest:

1) The federal reserve makes money vis a vis interest payments on the USGovt debt it holds, yet it has been allowed to have a huge influence over interest rates at both the short and long ends of the yield curve. So it can, in effect, determine how much money it will be paid in interest by the American taxpayer. This conflict of interest grows categorically larger as the central bank accumulates more and more bonds through its quantitative easing (monetization) scam. And yes, it is a scam.

2) The federal reserve, through its oligopoly control of interest rates in the US, can induce individuals and businesses to borrow from its member banks with ‘cheap’ rates, thereby using its influence to enrich its shareholders.

3) As a corollary to #2, the federal reserve, through its absolutely pathetic performance (largely intentional) with relation to its stewardship of the dollar’s value has caused more and more people to have to resort to debt. Obviously, those people borrow from member banks.

In case you’re not following the direction of this line of economic progression, we are quickly moving into a state of neo-Feudalism. We have debt slaves in America today although nobody in the bank-owned press will ever say it. What about the folks trapped in underwater mortgages, stuck with illiquid properties? Are these not nothing more than fancy debtor’s prisons? Their liberty of free movement has been curtailed if not eliminated altogether. Granted, most of these folks helped bring their current state of misery on themselves through various degrees of greed. To be fair, however, our ‘system’ here in America has become predatory over the last several decades. And government is complicit in that predation. The average person, both through blind trust and a lack of personal responsibility, has not sensed this change.

The terms that people would readily connect with unpleasant periods in history have been dropped down the memory hole and replaced with idiotic substitutes. We now say ‘kinetic military action’, ‘quantitative easing’, and ‘WIC/SNAP’ instead of war, debt monetization, and bread line.

Getting back to the not-so-USFed and its ownership of $2T + worth of government debt. It doesn’t end there. This outfit (and I’m being polite) also owns another trillion plus of various other assets such as your mortgage. Where did the money come from to purchase all this debt? You guessed it. From nothing. That is why it is called fiat currency. It’s worth what we say it is. That is value by fiat. We don’t have money anymore. We have units of currency that fluctuate in value by the minute. There are no benchmarks anymore.

Most pundits would scoff at this observation, wondering what difference it makes if Bank of America owns your house or the federal reserve owns it. It is all about consolidation, folks. Like it or not we are moving towards a one-world style monetary and debt system. This is nothing more than another Tower of Babel, being built to stretch toward a one-world utopia. The steps are small; incrementalism at its finest, but the progression is unmistakable, especially when you analyze larger periods of time.

This might not be a valid conclusion to draw if this was just an American phenomenon, but it is far from that. It is global in nature. Every central bank is monetizing, which essentially means that every central bank is destroying the value of its respective currency. It is a classic race to the bottom. And chaos has been the result and will continue to be. Granted, if you don’t pay attention to what is going on, you might be saying ‘what chaos?’ People can still go do pretty much everything they want. More and more of it is reliant on debt, but the stigma associated with debt has been largely removed since the late 1980s. I could point at the European catastrophe, but those of you paying attention already know all about it. The failure of easy money, lazy-is-fair (not laissez-faire), socialism-lite is obvious. The Keynesian justification has been exposed as a sham. Europe, save Germany, is toast. The props maintaining even a semblance of order are enormous. This is not just a failure of socialism and Keynesianism, but of the idea of a centrally control monetary system as well.

The central bank model is nothing more than an albatross. We’d be much better off without it.  The framers of the Constitution knew this and allocated the responsibility of stewardship of the nation’s money to Congress. But the Congress is full of imbeciles you might say; we need professional bankers and ‘economists’ to manage such important affairs, right? I dare say even the most incompetent Congress couldn’t do any worse than a malfeasant group of central bankers have accomplished through the most putrid of intentions.

I’ll readily admit there is no perfect system because there are no perfect individuals, however, we could certainly do a lot better than a 96% haircut over the last century. That’s a worse deal than the people of Cyprus got back in April and, for the most part, we don’t even realize it. We’ll hold lifelong grudges against family members or friends, but when it comes to the biggest con job in recorded history we display the memory of the average houseplant.

You can bet your last penny that the monetary chaos will continue, resulting in larger and more spectacular swings in markets across the spectrum. There will be another 2008. The recklessness and leveraging that guaranteed the fall of 2008 are back in full force and then some. The outcome is no longer in doubt. And guess what? Just like last time, nobody really cares. The people are complacent, the government is in full distraction mode, and the banksters rest secure in the knowledge that they’ll be made whole.

There is a nasty twist though this time around. When your smiling neighborhood banker stands on the gas and drives his institution headlong into the brick wall, it is your bank account he’ll be coming for first. When that isn’t enough (and it won’t be) he’ll run to Congress and use Jack Lew or whoever the Treasury Secy happens to be to pull a Hank Paulson and politic, sneak, and threaten until another taxpayer bailout is given. Or maybe the retirement system will need to be ‘nationalized’ to save America from another financial ‘emergency’.

Are these really the sort of people you want in charge of determining the direction of interest rates, our economy, and worst of all, holding our debt? These folks have no answers now, other than more of the same policies that got us into the mess to begin with. However, when the balloon goes up, they’ll undoubtedly have all the answers when it comes to restoring order and none of their ‘solutions’ will be palatable for the average American, or citizen of the world for that matter.

Ordo ab chao (out of chaos comes order). Welcome to Club Fed.


Andrew W. Sutton, MBA Chief Market Strategist Sutton & Associates, LLC[email protected]

Andy Sutton is the Chief Market Strategist for Sutton & Associates, LLC – a Registered Investment Adviser in Pennsylvania. His focuses are econometric modeling and risk management. The firm specializes in wealth preservation and growth and recognizes the validity of non-paper assets in achieving a balanced approach. The firm is also currently working with a growing clientele towards avoiding the risks outlined above.

The King James Bible mentions gold 417 times. Not once does it mention a paper currency.
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