When Hell Froze Over

“By the pricking of my thumbs, something wicked this way comes.” – William Shakespeare, Macbeth

On Tuesday, presidential candidate Rick Perry said further money printing between now and the election by Federal Reserve Chairman Ben Bernanke “…is almost treasonous.”

Immediately, politicos and pundits had their panties in a wad.  Karl Rove, White House press secretary Jay Carney, and Democratic National Committee spokesman Brad Woodhouse, among others, were compelled to denounce Perry for his “very unfortunate comment.”

Obviously, words can be dangerous things.  And they should be chosen carefully.  But come on…this is an election season after all.  What good would it be without a little hyperbole and good old fashioned populism?

When you get right down to it, Perry’s comment wasn’t too far off the mark.  Bernanke’s track record proves this.  Most notably the Fed’s Term Asset-Backed Securities Loan Facility (TALF), which, according to Matt Taibbi of Rolling Stone, “sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses.”

Was all this really in the best interest of the American people?

But somehow this guy’s still at it…

Robbing Savers

Last week, for example, Ben Bernanke promised to hold the federal funds rate to near zero at least through mid-2013.  What this means is the Fed will continue to loan money to the big banks for practically free.  If you save money or hold certificate of deposits this means you’ll earn a negative real return.

According to the Fed, maintaining a low federal funds rate will encourage bank lending and stimulate the economy.  Yet what it really stimulates is government debt.

You see, the first part of the Fed’s plan works just great.  The big banks borrow money from the Federal Reserve for practically free.  But that is where this supposed boon to the economy stops.

The big banks recognize the economy’s a basket case.  Why bother taking on the risk of loaning money to businesses?  Not when you can loan free money to the government at a 2 percent risk free yield.

It’s a no brainer.  The big banks get their essential product – money – for free and the government gets unlimited buyers of its debt.

The Fed has implemented this zero interest rate policy since December of 2008 – over two and a half years.  And they have promised to continue it for another two years.  While this lowers the interest rate the government pays on its debt, for savers, this policy holds interest rates below the inflation rate, and robs them of their wealth.

When Hell Froze Over

Through inflation the government covertly confiscates the savings of its citizens.  Where the United States is concerned, because dollars are a global phenomenon, when the U.S. Treasury and Federal Reserve act together to increase the money supply, they tax dollar holders the world over.

Yesterday the Labor Department reported that the main gauge of inflation, the consumer price index, jumped 0.5 percent in July.  That’s an annualized inflation rate of 6 percent. Moreover, that means the 12 month certificate of deposit from Bank of America, currently paying 0.45 percent, is actually yielding negative 5.55 percent.  In fact, after the first month you’re already in the hole.

Yesterday, no doubt, was a remarkable day.  The DOW dropped nearly 420 points. Apparently, the debt serpent in the old world, that grew larger and larger by consuming its tail, has now gnawed the whole thing down to the nub.  Fears of another liquidity crisis spread across the pond to the new world like a first fall frost.

But even more remarkable than the DOW’s nose dive yesterday was the occurrence of the impossible.  About mid-morning, flashing before our very eyes, was the simultaneous existence of a $1,820 per ounce gold price and a 1.98 percent 10 Year Treasury yield.

At first we couldn’t believe what we were witnessing…our eyes bugged out and our jaw hit the floor.  After a moment we pinched ourselves to confirm that indeed it had happened. Hell had frozen over.

Sincerely,

MN Gordon
for Economic Prism

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