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How Long Can They Keep
Bailing Out The Economy?

By Joel Skousen
World Affairs Brief
1-25-8
 
If there was any doubt about the Fed's willingness to flood the world with money in order to keep the existing economic order from collapsing, those doubts should now be completely put to rest. The financial Powers That Be (PTB) show no signs of allowing a real depression, let alone a collapse. Whether or not they can still pull it off is another question, but I think they will--their ability to keep manipulating the system continues to amaze me. They don't, however, intend to do this indefinitely--and can't. They only have to keep this debt system afloat until the next world war can wipe the slate clean--which may be still 5-10 years in the future. Who would have thought they could turn around the massive world bear market in stocks on Tuesday after Monday's precipitous decline in world markets? But they did and the flood gates of fiat money are wide open. The only thing surprising in all this is that the PTB appear to be able to shovel money out the door and the dollar still hasn't collapsed as it should--yet. This week, I will attempt to analyze why.
 
Foreign stock markets fell dramatically last week and again on Monday as investors lost confidence in the US economy. There was bad news from a variety of sectors. Beside the numerous reports from financial giants who continue laying off highly paid workers (Morgan Stanley is set to lay off about 1000 people), Reuters reported that "The largest U.S. housing finance companies, Freddie Mac and Fannie Mae, may report $16 billion in write-downs for the fourth quarter due to the falling value of their subprime mortgage investments... Freddie Mac, with $105 billion of subprime securities, could write down between $8 billion and $11 billion when it reports earnings if management deems losses in market value are 'other than temporary.'" Yes, they are certainly other than temporary! And, the actual losses are being understated by at least double.
 
The US Treasury in collusion with Congress and the Federal Reserve have made dramatic moves this week to salvage the economy from collapse--clearly indicating how bad the fundamentals really are.
 
First, the fed made an emergency interest rate cut of 75 basis points, dropping interest rates to 3.5%. The last time it made such a dramatic rate cut was August 1982. The Federal Open Market Committee is expected to cut rates again, if necessary, in next week's meeting--the last scheduled for January. Anything less than another 50 basis points will probably depress the markets.
 
Once the investing public gets used to huge bailouts, subsequent small ones have less effect. The PTB run the risk of having raised expectations of unlimited government intervention--which rewards irresponsible investing (at least on the part of the well-connected insider institutions). While lower rates allow banks to loan cheaper money to businesses in trouble and save many homeowners from large increases in monthly payment (having taken on variable rate mortgages), US Treasuries are paying much lower interest--which dampens investor's willingness to buy US debt. The temporary hike in bond values was only temporary as millions fled the stock market for the "safe haven" of bonds.
 
The Wall Street Journal opined that, "The central bank's moves may be too late to stop the U.S. from entering recession, as many economists now forecast, but it may make one milder and shorter. By acting so explicitly in response to market developments -- just a week before a scheduled meeting to decide on rates -- the Fed is running a risk. Investors may view the steps as panicky, undermining the goal of the rate cuts. And investors may come to judge the Fed's success narrowly, by how the stock market, rather than the economy as a whole, performs... The worst part of yesterday's decision is that it looked like more Fed appeasement of banks and equity traders." --which it was.
 
Second, Fed chairman Ben Bernanke made a dramatic speech calling for an immediate economic stimulus that must have immediate effects--that even summer may be too late. This was a dramatic change for Bernanke who has been reluctant to encourage dramatic interest rate cuts out of concerns for inflation. Also on cue, the President made a national speech last week promising a variety of stimulants, without specifics, hoping to quell stock market fears. It didn't work, as most economists know you can't just spend your way out of mountains of bad debt, which is the core problem. Bad debt is bad debt and won't ever be redeemed for what investors paid for it. That is why the Fed, in concert with other international banks has been flooding the world with liquidity--allowing central banks to trade new money for packages of the old debt at auction.
 
Third, Congress agrees to grant over a $150B in instant tax rebates to everyone who makes less than $75,000. This is more welfarism than rebate since the people who pay the most taxes won't get any rebate, being over the $75,000 limitation. Worse, the Democrats insist that "rebates" go even to those who paid no taxes. The most irresponsible part of the deal was that everyone involved went into the meeting with the assumption that this would be funded by more deficit spending--no need to make any provisions for cutting spending to balance the budget.
 
Fourth, One of the key structural elements undergirding the bond markets are the bond insurers--several of these companies are now technically bankrupt. Their ratings have been downgraded and a bailout is in the offing--at least $200B is needed. The AP reported "Shares of bond insurers rose sharply Thursday on hopes the sector could receive support from a possible bailout orchestrated by New York insurance regulators. Shares of Ambac Financial Group Inc.,.. Security Capital Assurance Ltd... and Assured Guaranty all rose. Only [the most troubled] MBIA fell, dropping 4.2 percent. On Wednesday, New York insurance regulators said they were working on a plan to help bond insurers attract more capital and increase capacity, including meeting with major banks to discuss the potential for a rescue plan."
 
Fifth, nothing had any significant effect in the markets until the Plunge Protection Team intervened directly to prop up the stock markets with massive purchases of future options on Tuesday and Wednesday. They spent billions and succeeded in dampening the fall on Tuesday and opening up a huge gain on Wednesday that continued on into Thursday--recouping much of their investment as other lemmings took the bait and started buying into the rising market.
 
Even Gold prices took an initial hit, falling $20/oz.--probably due to many investors having to cover margin calls--but recovered thereafter to over $920/oz. I expect gold to rise steadily upward from now on.
 
(snip)
 
LONG-TERM OUTLOOK
 
Short-term interventions in the futures markets are only effective in changing the psychology of investors from bearish to temporarily bullish--which plays a role in keeping people active in the stock markets. Since few stocks give dividends any more, most investors only gain when stock prices go higher. They are driven to invest in stocks and other higher yielding instruments precisely because interest rates on safer investments (savings) are so low. People feel compelled to park their money elsewhere--especially when true Inflation is now above 10%. There are also trillions of dollars in retirement funds that are searching for productive returns, because of fears of inflation.
 
All of this accumulated saving impacts the economy in two ways. A certain percentage of the economy is driven by the consumption from those who are living off these savings and investments. The funds from those who are not withdrawing interest or principle are being reinvested elsewhere, and since many of those investments were highly speculative, or misrepresented, much that money isn't ever coming back. There are millions in this country counting on there pensions and investments to be there when they retire. Much of that value is already gone, and most don't know it--because of the deception in reporting values.
 
The underlying problem infesting our economy and the world is mountains of bad debt. How bad is it? Wall Street spinmeisters are claiming a mere $200 billion in total bond losses and maybe another $400 billion down the road. That is grossly understated. According to Jim Willie and other gold experts, prime mortgage bond losses are at least $2T (that's Trillion), Subprime losses total $1T, and total mortgage bond losses are $3T. "The official estimates are wrong by a factor of 10!" says Willie. "Gold will skyrocket when these numbers are finally reported." That's where he is wrong--at least about the reporting. The numbers will never be reported honestly. Deceiving the public and covering up for gross malfeasance is part of the financial system now.
 
Good investments have been packaged along with bad debt instruments to make them more saleable to investors worldwide. In reality, this practice has only compromised the good. Even firms that insure and rate these debt instruments have been complicit in falsifying the value of these debt packages. Moreover, major brokerage firms misrepresent the values when they are marketed. Besides the legal liability for this investor fraud, which may never be sorted out (except for the major players), the problem is that the money is gone. It has been spent. Worse, derivative bets have been formed on kinds of market conditions and debt instruments (as hedges) and those liabilities run into the trillions. That is the next bombshell waiting to drop.
 
What the financial PTB are trying to do is make sure enough liquidity is injected so that institutions responsible for paying out the interest on these debt instruments stay solvent. As long as the interest keeps flowing, the PTB hope that the falling values of the underlying assets can be downplayed or covered-up. That's why the administration is working to keep foreclosures on bad debt to a minimum, slowing the domino effect.
 
In short, if the Fed continues to bail out those with huge sums invested in packaged debt instruments, the money will continue to flow downhill into the US economy, where it can continue to fuel business investment and consumer spending. There will be job dislocations as companies scramble to remain profitable, but as long as the government is inflating the currency new investment will slowly adjust and create new jobs. Ordinarily the government would not be able to do this without creating hyper inflation, but it can still do so for a while longer since holders of dollars are held hostage to the magnitude of dollar dominance. The dollar market is so large compared to other currencies it continues resist destabilization. But, at this new rate of liquidity injection, which is massive, that resistance will be shaken eventually. The Fed has for many years slowed down monetary growth in such a way that the bubble s they create are slowly allowed to deflate and the markets have adjusted, over time. Now, with bailouts accelerating to previously unheard of levels, we are sailing into uncharted waters at higher speeds and with bigger waves.
 
Most of the large international holders of dollars have pooled their funds into Sovereign Wealth Funds. Even so, they are still held hostage by the sheer weight of their holdings. They can't begin to dump dollars in large amounts without destroying the remaining value. Why don't they all switch to Euros? In the first place there aren't enough Euros in print or on the books to absorb the massive international dollar trade. Even the degree to which the Euro is being inflated presently, to meet current demand, is causing significant inflation in Europe, so the central bank is limited in how fast it can accommodate the increased demand for Euros.
 
What Sovereign Wealth Funds can do is buy more products, banks and companies priced in dollars. As Jim Willie of www.goldenJackass.com wrote, "The Sovereign Wealth Fund (SWF) movement has begun to expand in a powerful manner, and will not go away. In fact, it will expand on a grand basis since foreign nations have had their fill of US Treasury Bonds, and see risks ahead for any US$-based investments. The SWF fund movement is intended to pursue the two prime commodities, GOLD & CRUDE OIL, the premier financial anchor and commercial fuel in the increasingly upside down world [but are being forced into other markets].
 
"Several stories have emerged, of Chinese and Arab funds purchasing giant equity stakes in large US banks. [This is a kind of] creditor receivership in stages... In the past few months, a total of $60 billion has been poured into the Western big banks... Rather than to permit the banks to go bust with embarrassing bankruptcies, the creditors (benefactors) have dispatched grand sums... in exchange for large stakes in their capital structures.... relinquishing some control in the process."
 
F. William Engdahl has written a detailed history of how the fed got us into this mess. It's a fascinating look into how they used oil shocks and stock market crashes to generate new predatory instruments of investment, like derivatives, to both benefit insider traders and control Third world countries in South America, Africa and the Middle East. I don't usually quote Engdahl because of his former relationship with Lyndon LaRouche--the Marxist claiming to be some sort of anti-globalist "conservative." But, since his break with LaRouche, he has written some very incisive pieces. Just keep in mind that he comes from the Left; not all his conclusions are right.http://www.financialsense.com/editorials/engdahl/2008/0123.html
 
 
World Affairs Brief 
 
Commentary and Insights on a Troubled World.
 
Copyright Joel Skousen. Partial quotations with attribution permitted.
 
Joel Skousen's World Affairs Brief  http://www.worldaffairsbrief.com
 
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