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March 29, 2009
Issue 39  -  More Government Shenanigans

It seems that our government in conjunction with the Federal Reserve have taken a hard left to Socialism. With the jaw dropping increases in debt and spending, along with proposed takeovers of any company that isn’t “doing the right thing”, we descend a few steps further down the road to complete statism.  Our current debt is literally spiraling out of control.  Read this from GATA:

“The Federal Debt has resumed its rapid ascent again and it’s increases for the past year and for the fiscal year since September 30, 2008 are tremendous. The Federal Debt is currently $11,041,711,544,305.34 and it crossed the $11 trillion mark for the first time just 9 days ago on 3/16/09. Over the last 12 months, the Federal Debt has increased $1,649 billion dollars. For the fiscal year it has increased $1,017 billion and the fiscal year is not even half over yet. Worse yet, the surplus from Social Security and Medicare is dropping. This surplus for the last 12 months is $192 billion which is below previous annual rates of around a $300 billion surplus. Also, in past years when the annual deficit was around $600 billion,the $300 billion SS/Med surplus meant the government only had to borrow $300billion per year from the market to pay its bills. The government’s reliance from the market for its bonds and notes has now reached $1,457 billion over the last 12 months. Needless to say, the continuation of this borrowing is not possible and we now have the Fed admitting that they will start printing money to buy the treasuries. Now that the Fed has opened this door, I doubt they will be able to shut it as they will now have to both monetize the debt and buy treasuries from current holders who will sell because of the falling dollar.Regards,


Please read that over carefully.  Reagan is often criticized by Democrats as having increased the debt tremendously while in office.  When Carter left office the debt stood at almost exactly $1 trillion. Eight years later, the debt stood at $2.8 trillion, a $1.8 trillion increase.   (To see all president’s debt numbers see here)

 We have almost added that much in the last year alone!  Of course, that doesn’t account for unfunded liabilities such as Social Security of baby boomers, medicare and government pensions.  It is estimated that number will be over $8 trillion this coming year.  Clearly something isn’t right here.  This is an unsustainable trend.  Which year will it end?  It’s not possible to know but rest assured, it will end. 

I want to explain a little bit about how and why the Fed prints money, and why they will be doing so in increasing quantities as time moves forward.  The government must balance it’s inflows and outflows every month.  If tax revenues don’t cover outlays, than bonds or bills must be issued to cover the difference.  Investors buy the bonds and receive an interest rate in exchange. Let’s take an example where things go wrong.  The Treasury needs to raise $100 billion to meet the deficit.  They announce an auction to sell the bonds.  If more than $100 billion is bid then all is well in the world.  If, however, there is not enough bidders, the auction will “fail”.  This happened in Germany a couple weeks ago.  At this point the Fed will print money out of thin air and buy the rest of the bonds.  This is called monetizing the debt.

This is a pretty good deal for them because they get paid interest on money that was free to create!  This is what the announcement 10 days ago meant.  The Fed is going to print money.  In fact it looks like they started before letting everyone know: (again from GATA)

Fed already bought 162 billion!!treasuries last week

Hi Bill
Today’s announcement that the Fed would start buying treasuries tomorrow is rather interesting. On March 18 the fed announced that they had instituted a program to buy treasuries as well as agency securities. The amount of treasuries to be bought under the program was 300 billion dollars. The Fed and their team of manipulators had been capping interest rates on the ten year at just over 3% and the 30 year at 3.7%. Before the fed announcement the interest rate on the 30 year was attempting to breakout above 3.8%.

The fed report for the week ending march 18 showed the fed bought $162 Billion !! of treasuries. That's more than half the amount for the entire program. It happened during the week that they announced the program. Since the original announcement rally, treasuries have been sinking. Especially the 30 year which had already broke the old 3.7% limit until the end of the day (Mar 24) Fed buying announcement. So I guess the program is really $462 billion.

Either way the Fed will have to expand the program to include any trading partner that wants out. The Fed has shown its hand. They have a busted flush. Every purchase of treasuries makes it more obvious just how weak the US dollar really is. The Chinese and the Russians and the Oil states will all turn to the Fed to buy their bonds.  The fed can't refuse and all the dollars used to buy those bonds will flood the market looking for a home.  Inflation will come roaring back making the deflation we experienced the last six or seven months look like a picnic.
Steve Silver”

What does this mean?  It means we were going to have a “failed” auction.  Not enough bidders showed up so the Fed turned on the printer.  In fact they bought half of the auction.  This is highly inflationary and expect the buying to continue as there is no one else left to buy.  In fact, as Steve says in the quote above, there will now be additional sellers and the Fed will HAVE to buy.  Look at this chart of foreign buying of U.S. assets/debt from contrary investor:


This chart adds up all the foreign purchases of US assets (stocks, treasuries, agency paper (mortgages)) and it clearly shows that foreign purchases of our assets has plummeted.  If there isn't enough money to balance the budget each month, then the government must take action.  The Fed HAS TO buy these bonds or there will be a stoppage of the government. Mandatory budget cuts will be implemented.  The Obama administration and the Fed are not about to let that happen, so the presses will run 24/7 if necessary.

Now you have been hearing a lot about the AIG bonuses. This is really misdirection for what is really troubling about AIG.  Now the bonuses were a great travesty, but the amount of money is trivial to the totality.  One interesting tidbit about the AIG bonuses that has been little reported is the fact that there were 73 bonuses over a million dollars and 12 of those people are not currently working for AIG and afew are even out of the country!  These were supposed to be retention bonuses right? So if they are gone, how are they getting paid for having stayed?  Interesting. I read a theory that has some plausibility to me.  The bonuses were in actuality hushmoney.  We’ll pay you a million bucks but just keep your mouth shut.

This looks entirely realistic when you see this:

“AIG rescue assured much bigger payday atother banks

Submitted by cpowell on 09:38PM ET Tuesday, March 24, 2009. Section: Daily Dispatches

Treasury Preserves Bank Payday with AIGRescue Cash

By Mark Pittman and Christine Harper
Bloomberg News
Tuesday, March 24, 2009

NEW YORK -- The U.S. Treasury Department preserved a payday for five banks that was worth almost 200 times the bonuses handed out at American International Group Inc. through a government rescue.

As part of a bid to prevent the insurer's failure, the U.S. settled derivatives and loan contracts worth $32.7 billionwith Goldman Sachs Group Inc., Merrill Lynch & Co., Societe Generale, Deutsche Bank AG and UBS AG.  That's about half the $66.7 billion that those companies,the five biggest beneficiaries of loans and capital infusions for AIG, said they spent on pay and benefits last year for employees, some of whom created or traded toxic subprime assets that proved deadly for lenders…”

You see how this works.  Distract people with “egregious bonuses” while you steal 200 times as much.  Add into this, that the Fed was the driver for the government buying AIG and the fact that the banks, like Goldman Sachs, are the OWNERS of the Fed and a very dark, seedy picture is drawn.  We are being swindled, plain and simple. 

Now it even gets worse.  You have probably heard about the plan where “private investors” will get to buy up some of these toxic assets on bank books for a reduced cost.  This is being touted as a great deal for the government, but is it?  Read this from Gata:

Dave from Denver

If you want to understand Geithner'splan and why it will fail

"First note that the public sector as a whole (Treasury plus FDIC) is at risk for $78 out of a total investment of $84.  The public sector has the same upside as the private sector (through its $6 worth of equity).   However, the private sector gets this upside by putting only $6 at risk, against the public sector’s $84 at risk. Small wonder the stock markets loved this. If there were a stock market for taxpayer equity, it would have tanked by a commensurate amount."

The other important point in the essay is that the bulk of the funding is supposed to come from the FDIC, which has very little money right now.  FDIC has a proposal in front of Congress allowing it to borrow $500 billion from Treasury. So in essence,  what's disguised as"FDIC leverage" is really taxpayer funding.  The biggest issue in the whole Geithner steal-from-taxpayers-give-to- banks plan is what will be the price paid for these toxic assets.  Goldman Sachs put out a study last night showing most banks are still substantially marked way too high on their books (I didn't need the GS study, I've looked at many balance sheets and concluded the banks are overmarked by at least 50% on most assets).   If true market prices are paid, the banks still have massive mark-downs and losses coming.  If phoney prices are paid because it's just the stupid taxpayer's money, then this is wholesale theft by Geithner/Bernanke/Obama and Wall Street.”
So we are going to let people put up 7% of the equity and then receive 50% of the profits?  If the assets go south, the “investors can only lose their 7% while the taxpayers can lose 93% and possibly more if the vehicle can have a negative liability.  If that doesn’t make your blood boil then I don’t know what will.  These guys are so brazen, so cocky, that it is amazing.  All the while congress is asleep at the switch or pushing for this plan.  Geithner now wants to take over businesses that DIDN”T RECEIVE any TARP money if it suits them.  This is happening faster than I would have thought possible.  Please, please, please make sure you have some gold and silver in your possession.  This will not end well.  
 On an unrelated note my buy target for getting back in the general market was hit.  I have placed money in a Wilshire 4500 type fund and an S&P 500 fund.  I am looking for a 15% or so rally before we turn down again sometime later this year.  This is not investment advice, just a record of what I'm doing, as I like to lay all my cards on the table.  If I sell, I'll report it here.