Ch. 13 Fed Magic: Backbone to the world
Congressman Ron Paul is the poster boy of Federal Reserve reform. He’s been after them for over 30 years. Maybe most memorable is his part in exposing the latest scandal. The Federal Reserve had been found giving out some $16 trillion in loans to foreign banks, other countries as well as private businesses. This was on top of the $15 trillion the feds already had in outstanding loans to America now showing up as US deficits.
Fed Loans Attacked
Republicans and Democrats jumped on the bandwagon to attack the feds in ways rarely seen before. They demanded greater transparency and some went so far as to push for an independent ‘audit of the Federal Reserve.’ Historic indeed. Members of Congress held up case loads that looked like the worst of backroom crony capitalism, sovereign state conspiracies among a host of other sordid sounding corruption charges that trailed into hundreds of billions of dollars in ‘loans.’
Loans Support $
Most striking was their conclusion – including Ron Paul’s. The Federal Reserve had gone on an international spending spree to prop up banks, business and gov’ts of other countries. This was apparently all part of a desperate bid to provide them with direly needed capital support. It also pointed to a soft bribe to get them to shore up our own sagging US dollar as well.
The story suggested the feds lent money to other banks to gain their support and provide them the means to buy our own fed notes. There are some cases that looked a lot like the feds ‘paid-off’ buddies to guarantee their cooperation. This has the trappings of a grand ‘conspiracy,’ but this one is a bit anti-climatic. It denotes the feds desperate attempts to keep the global financial system running while protecting the US dollar from collapse. This sounds more like an expansion of their job description rather then the designs of sinister corruption. Ron Paul seems to have said as much. He pointed to this as a prime example of the madness of our economic system where the feds have to go bail-out the rest of the world in order to save ourselves. And he’s right. Now, if only we could have more scandals like this.
Thief Saves Family
This leaves us with one of the great scandals of all times (in terms of sheer size and scope). And yet, it has the ring of Herculean feats of economic wonder. The feds seem overextended to the point that it almost seems gallant. The feds have their host of critics, but any other institution doing the same for us would have been applauded as extraordinary. Let’s assume the worse of the feds for a minute. It would still leave us with a story line that reads like ‘the thief’ gone good. It has that ring to the tale of bandits on a ‘job’ to steal, but who end up saving the family from their burning home. Has such a day come?
$16 Trillion to Save $
However you wish to cast this narration, the fact remains. The Feds pumped-in $16 trillion dollars throughout the international financial system. The motive seemed to be in their bid to buy support from other countries to float the American market (dollar). You may see bankers as ‘the bad guys’ and in times past, they have served that role well. This time maybe different though. The feds happen to be the final remaining support behind America’s financial system. The feds have done more to avert America’s immediate economic collapse then all other subsidies combined – by several times. Some may blame the feds for the initial mess, but at this point, they also saved us from it – for now.
Leverage Debt Reduction
There is one last caveat. It appears that the feds lent out this $16 trillion to other international banks so that they would in turn buy our own US debt. This means that paying off our $16 trillion in federal deficits will reverse the process. Deficit reductions will allow the feds to repay the banks for their loans to us. Those banks will then repay the Federal Reserve. In short, we may have another example of Leverage Debt Reduction, but this time, it’s both circular and international wherein the fed simple repaying itself via the international banks.
Mirror Copy of Commitment
One debt is really just a mirror copy of the other. This has the appearance of the old house of ‘smoke and mirrors.’ Everything seems but a reflection of the other, but there is some substance to all this over some brilliant slight of hand. The value is grounded in monetizing the participation and commitment of each new player. Each ‘mirror’ copy of debt serves to highlight a new participant and their backing to the original asset. In this case, the original asset is the American homeowner.
The banking bailout is a case in point. The US gov’t bought $4 trillion worth of real estate securities. This was not simply a case of trading debt but rather, the feds were lending federal guarantee to these banking securities. It was more a transference of obligation rather then the creation of a new one. Yes, this now shows up as $4 trillion in federal deficits, but it still has Wall Street on the hook for that original $4 trillion in obligations too. This leaves us with the appearance of $4 trillion in federal deficits along side Wall Street’s $4 trillion in outstanding ‘toxic loans.’ The country is now ‘booked’ with $8 trillion in total debt and liabilities, but it’s actually more a case of the Feds co-signing for the banks obligations rather then them getting a whole new and unrelated loan.
Tangible Value: Co-signer
It would be comparable to parents co-signing for their kid’s loan. Say the parents were co-signing a $10,000 loan for their boy. The terms may require the parents to front $10,000 from their own bank account as collateral. We now have the parents showing this new $10,000 liability along side their son’s $10,000 loan. It seems the household has a combined debt of $20,000. It actually is not. In a sense, it’s the same $10,000 loan simply being counted twice. It looks like a ‘new’ loan to the household budget, but its more a guarantee of the first loan by the second one. The larger issue is that this guarantee by the parents does in fact represent an added value to the loan rather then simply placing a new liability upon the system. In short, this ‘extra’ guarantee represents a real and tangible value over the smoke and mirror look of it. This was true of these banking bail-outs. We now have two institutions committed to backing these real estate securities. The first is the banks and then if they fail, the gov’t. The ‘trick’ worked thereby buying us a half decade more of near stability. Most of this was exclusively due to this federal reassurance. This indeed translated into a real and substantial value – the near stability of the last half decade.
Banks Guarantee Feds
Raghu-nomics uses this example to explain the federal bail-out. This happened again when foreign banks then went to buy $4 trillion in fed bonds. These bonds were issued so the feds could buy real estate securities. This is the international banks saying they back the feds commitment to these securities.
Backed by 3 Parties
This gives us three separate parties all putting in some stake to back these securities. It does create some added expense. Each party wants some ‘fees.’ This is held up by critics as proof of the fraud and corruption of the system. On occasion, this is indeed the case, but not so much this time. This also works in reverse as well. Each party now has something to lose if things falter. Things fail all the time. So at the end of the day, this gives us 3 parties standing behind these securities. You have
- Wall Street
- The Feds
- International Banks
They have each backed this same securities asset with their own $4 trillion in cash. This gives us the appearance of now having $12 trillion in total debts being held by the US and these international banks. Of course, the amusing part is that all this is the same $4 trillion in securities from Wall Street. It’s now double guaranteed by the feds and the international banks as well.
The plot now thickens
Feds back Banks = $16 Trillion
The feds in turn loaned to these international bankers so they would have the money to buy these fed bonds. It seems this is the ‘expose’ Ron Paul ‘discovered.’ It maybe one of a few examples of the fed actually working to save the USA over the typical banking conspiracies to defraud America. This particular ‘bailout’ had the effect of getting different parties to back each other. In this case, we now have 4 institutions standing up by ‘lending’ money to the other. It has the look of 4 separate loans for a total of $16 trillion in debts and transactions, but all of this is based upon the original $4 trillion in real estate securities.
We cut back to media reports about this ‘unsustainable’ debt of $16 trillion in ‘out of control spending.’ Meanwhile, there still remains the distressed homeowners. Adding in their $4 trillion in ‘debt’ leaves us with the appearance of $18 trillion in debts and a country in economic free fall. We shake our heads in disgust to hide our growing fear that we witnessing the end days. Raghu-nomics is suggesting that ‘all’ this debt is really the same debt now counted 5 times (once you include the homeowner). It’s more an accounting issue then an economic one. As such, resetting the accounting will solve the problem.
Brilliance of Back-up system
The news gets even better. These mirror debts are actually part of our back-up system. Each party is demonstrating one more safety guard now activated. Like all back up systems, this also has its limits. We are approaching those limits quickly. However, the activation of these measures does not mean we are in the final phase of the systems break down. These back-up systems are sustainable as long as they can tap the time value of money. We will be ok if the time value of money offers a higher rate of returns then the price of the debts they are holding. This appears to be the case for a growing number of areas of the economy. If true, these steps outline the extraordinary power of our system in action. At least, that’s the fascination I’ve been able to see it in. Just when I was expecting the system to crash, a whole other back-up system kicks in. Put another way, any other country would have simply collapsed given they don’t have these multiple backups. This safety program has kept us chucking alone to fight another day. This explanation is not to serve as a cheerleader for the Federal Reserve and banking system, but rather, we will be able to tap the full benefits of these back-ups only by recognizing their functions and value.
$16 Trillion Piad w/ $4 Trillion
We now have this $16 trillion in debt, but this entire amount (of our example) will be paid off when the homeowner pays off or refinances their home mortgage. This will allow Wall Street to settle its ‘toxic loans’ which will then allow the feds to pay-off these federal deficits to the international banks which will then allow these banks to repay the Federal Reserve. The circle of life has its alter-ego in the circle of banking. It’s all hitched to the homeowner. Raghu-nomics therefore recommends the simple solution to be found by allowing homeowners to write-off their over inflated mortgages as part of their monthly mortgages over 30 years.
Paid w/ Tax Write-offs
We discussed above how real estate multiplies its equity appreciation. This will reduce the time needed to reduce these write-offs to just 10 years rather then 30. We can find these kinds of simple solutions once we have stepped beyond the political blame game and look to see the real cause behind these problems. A proper diagnosis allows a more effective prescription and often, a more simple one. Welcome to Raghu-nomics.
Republicans get 5 stars for getting it right when it comes to recognizing the gravity of our federal deficits. Their shrill demands for budgetary discipline finds its validation by looking at these trillions in subsidies. We have the $16 trillion in today’s US deficits. We have a whole other subset of another $16 trillion in foreign loans by the Federal Reserve. This was handed out to the rest of the world so they would buy our bonds and currency. Without it, our currency would have collapsed. This comes to $32 trillion in Federal Reserve subsidies alone. There’s $2 to $5 trillion more spent on war to protect our currency, oil and other commodity access. That brings it up to $35 trillion. There’s the additional Export Inflation and other currency battles worth trillions more. We have corporate write-downs and cost efficiencies that saved us another trillion or two. We have tech and energy offsets along with gold to absorb excess liquidity. This gives us $35 to $40 trillion in total subsidies the US has been allowed in just this past half decade. The Republicans may have come across as unrelenting, but they have $40 trillion reasons to justify their hysteria.
Meanwhile, the Democrats call for ‘productive investment’ is accurate though understated and poorly explained, targeted or implemented. We will upgrade this Democrat approach with our ’10 Steps to Great Manufacturing Jobs.’
Most of the $40 trillion we pointed to above was gained for just one reason and one reason only. We could excess this $40 trillion in subsidies because of the US Dollar’s role as the international currency of exchange. Without this, we would have been cut off at about $5 maybe $10 trillion. This would have left us with maybe 10% to 20% of these subsidies. We would look a lot like Mexico or Greece after their currencies imploded. Our economy would be 50% to 90% less then what we have today.
Currency of World Worth Trillions
Today’s deficit spending has allowed us to keep hold on to that rare and irreplaceable economic status as the currency of trade for the world. Few others have ever been allowed this privilege and none have achieved the reach we see of the US dollar. It has gifted the US with tens of trillions in free and profitable loans as billions of people from hundreds of countries now hold our notes of credit (currency).
$40 Trillion in Subsidies
The deficit spending that allowed us time to continue on as the worlds currency is likely the greatest examples to the time value of money. It’s worth $40 trillion in the subsidies we’ve gained against the $16 trillion we have in deficits. This represents another threshold as well. It’s a polar shift wherein the feds are far more obliged to the US in ways never before seen.
US Composite of Global Economy
The feds foreign related banking business has expanded America’s value far beyond what the country could return to the feds. The feds therefore subsidize the US beyond America’s immediate value. The value is no longer in America alone, but that of the ‘global economy.’ The US dollar is the linchpin to today’s global economy. This leaves America to ride upon a composite of all the worlds’ economic activity. The US dollars unique status has allowed us this unique privilege. This recast the dollar far beyond the country’s own economic measure. Hence, the ever growing ‘free’ credit from the Feds and the rest of the global banking system.
Captor is Captive
It’s almost as if the US has banks ‘over a barrel.’ It’s never quite happened like this before. We had debt like this in WWII, but there were few other places to put your money back then. All the rest of the countries of the world were ravaged by War. The USA stood as the sole nation untouched by conflict. We have the equivalent privilege again today. It’s due to our status as the global currency. This has led the Feds to provide us with cash and credit far beyond our own national worth once more. Old conspiracies talk of such debt as a means to crush America into bondage. Today, that maybe reversed wherein the feds are now bounded to America with more to lose them the US has in the game. The captor has become the captive of sorts. Such is life.
Both Parties Correct
In such a world, both Democrats and Republicans are correct. Democrats insist that failure to raise the Federal Deficit Ceiling would be catastrophic. True. Behind this lies a subtext that deficits don’t matter that much. Very wrong – but for these ‘miracle’ subsidies.
Miracle Saves Democrats
Meanwhile, Republicans are pointing to deficits as a tipping point for economic collapse. They are also ‘right.’ Today’s deficits are a ‘text book’ case of pre-hyper inflation. As it turns out, a dozed economic miracles have saved America from this hyper-inflation. This leaves the Democrats ‘looking’ like they have been right about deficit spending while conservatives look like cold hearted drama queens throwing a tantrum when they don’t get their way. Democrats got lucky and don’t know it. That luck is running out. They think conservatives are being hysterical for no reason. Republicans don’t know how right they are -unless they account for these ‘miracles.’
Feds Buying Us Time
At the same time, Republicans fail to recognize the value of the feds role right now. Republicans appose feds policies. They complain bitter about the feds printing all this ‘free’ money as the feds work to stave off the collapse of the US dollar. Republicans feel this is only making the problem worse by expanding the bubble. That would normally be true, but for these deflationary factors mentioned above. These deflation factors have created a different economic dynamic. This is not creating another bubble like we saw of real estates cheap money in 05. This time, the feds are buying us time as we work to regain real value. And so far, it’s actually beginning to work. Now, we have to see if we can get far enough ahead of this coming apocalypse before it catches up to all these miracle advantages and leads us over the economic plank.
Today’s economic performance is one of the most dramatic versions of a ‘slow landing.’ Put more technically, the fed is putting the ‘time value of money’ to work for us. We see this time value of money in real estate, refinancing or alternative industries like green energy. In each case, it’s allowing these areas more time to find some economic traction greater then the composite of all our debt. Each of these areas of ‘bailout’ taps the ‘time value of money.’
Not Spending Way Out
The Democrats call this ‘spending our way out of debt.’ That is not really the case. This is not an accurate description. Most of today’s ‘stimulus’ was geared to ‘refinance’ rather then create new value. The banking, insurance and auto bailouts are simply refinancing the ‘time value of money’ rather than offering a new set of ‘productive investment.’
Building out new value (productive investment) is the center piece of the Raghu-nomics proposals. Raghu-nomics can delineate between refinancing and productive investment. Refinancing is more about recouping value that needs more time to find its traction. Productive investment is where you jump start or expand upon the potential value of a person or thing beyond its present worth. This is the process for recreating the wonder of great paying careers over dead-end jobs. This is far easier then we realize.
Context of Value
Raghu-nomics will do for ‘productive investment’ as we do here in our review of deflation/inflation. Raghu-nomics identifies where those values lie and a context for them that allows us to better tap them. That is at the heart of the ‘10 Steps to Great American Jobs.’
It’s in this approach we came to see how ‘austerity’ programs fail to account for the time value of money. A great example maybe Iceland. Iceland rejected their international debt and started over again with a clean slate. This allowed them to add instant value by resetting their nation’s assets and people to operate at full capacity. Their productivity was no longer handicapped by debt. This jumpstarted capital flows, economic turnover and financial returns. This had the result of returning money back to investors far faster then austerity programs could have done.
Bailout Inverse of Iceland
The US banking bailout was an inverse of this Iceland program. The US banking bailout allowed us to sidestep the impending economic collapse (of the world). It also allowed us to avoid the kinds of austerities that were imposed by the European bailouts upon their distressed countries. Those European austerity measures crushed the people’s economic performance. America’s banking bailout saved us from this (so far) though we have been somewhat impaired by this market crisis.
$1 Billion vs. $5
Let’s use Iceland to demonstrate the point. Let’s say Iceland owed banks (investors) $1 billion. Let’s also say that an austerity program slowed Iceland’s turn around time. This slow down would take Iceland 15 years to generate this $1 billion back again. Let’s contrast this against bankruptcy as Iceland did. Suppose that dropping this debt allowed Iceland to generate $5 billion in new economic activity over that same 15 year period. In short, $5 billion with austerity measures vs. $15 billion through debt forgiveness. This would be the difference between debt forgiveness vs. austerity. Which provides investors a better deal? This presents banks with two choices:
- Introduce ‘austerity programs’ and slow economic activity and overall returns in the name of trying to recoup their original loans or
- Start over and have several times more then the money already lost. ($1 billion vs. $15 billion.)
Austerity Can Work - Sometimes
There are times austerity measures can work too. For example, a stand alone country implementing austerity measures will find pricing advantage over their neighbors. That advantage is lost when their neighbors are also reducing both consumption and cost of production too. If several countries from the same region all drop their prices via austerity, they end up with deflation (and economic collapse).
Deflation vs. Jump Start
When Mexico or even the Asian Tigers faced similar economic havoc, it ended up making their products more cost competitive to the US and other export markets. Therefore, these countries could jump start their economies again relatively quickly. Greece, Ireland, etc have no such counter part to market to or produce for. In these circumstances, austerity will create a cycle of deflation and economic stagnation. We see this of Ireland, Greece and the other European countries subjected to ‘austerity’ programs.
Good for Stand Alone
Austerity could have worked for Greece had they been the lone country to be implementing these measures. It would have provided Greece an added export advantage by having reduced labor and other production costs. This is nullified when so much of the region is facing the same reduction to costs and consumption. Stimulus would be the better alternative as we see of Iceland. It would provide investors a faster rate return – by multiples.
This is the downside to experts. Because austerity measured worked for other countries in the past, it’s assumed that it must be universally true for all countries and all times. They fail to find why something works and blind to see when it won’t.
USA Depression of 21st Century
America may be a case in point. This ‘great recession’ is actually America’s 21st Century Depression. It’s what a 21st Century Depression looks like once buffered with
- Social Security to carry seniors and disabled,
- long term unemployment benefits to carry the unemployed,
- food stamps to carry families,
- banking bailouts to float banks that would have otherwise collapsed,
- bridge loans for businesses that would have gone bankrupt,
- refinanced millions of unqualified distressed homeowners that would have otherwise been foreclosed upon by tens of millions,
- better term student loans etc,
This is the very list conservatives point to as a demonstration of out of control gov’t spending. These are actually the pillars of the bridge carrying us over this ‘great depression.’ This is the point the Feds are making, but a growing number of people don’t believe them. Irony indeed. To remove some or all of these programs would have left us looking a lot more like the ‘great depression’ as we saw of the 1930’s.
Compare 30’s w/ Safetynets
It would be interesting to see how different things would have been if all these same ‘safety nets’ had been in place back in the 1930’s. It would likely look a lot like this ‘recession’ today. There would still have been a host of banks that failed while most others transitioned over to better ones. Old folks would have had room and board, moms and kids would be fed and schooled, businesses would be limping along and the poor would have food and shelter.
This is what the feds have ‘saved’ us from so far. Raghu-nomics can help us take the final steps to climb out of this ‘depression’ once and for all.
Childhood of Conspiracies
I grew up on a diet rich on banking and fed conspiracy. It started with books like ‘None Dare Call It Conspiracy.’ Our ‘Minister of Education’ read this in our boarding school as our bedtime cap when I was 12 years old. This left me to view banks in general and the feds specifically as the center of all the worlds evil. There they stood behind every brand of economic manipulation, political unrest, corruption and most of all: war. Banks were the foundation of modern colonial exploitation as seen of the East India Company that found its latest incarnation as the Federal Reserve and International Monetary Fund. They provided the firepower and monetary advantage to the US at the expense of ‘third world countries.’ Hence, I paid close attention over these decades to their play of debt and war. However, in following along each step of their ‘exploitation,’ I began to also see a growing number of side benefits. Some of these are laid out here.
Fed Screw-ups for Better
While I gather that the original intent of the Federal Reserve and the international banking system were bread upon sinister agendas, they keep screwing up as humans are apt to do and so end up providing a slew of benefits against their best efforts to do otherwise. For American’s, the best example maybe installing the USA as the center piece to the global economy and all the benefits the country now rides upon because of it. There are many other benefits and will cover those in our book: ‘Golden Child: You are the Gold. The Feds power of transformation of the American individual as walking gold.’
British & India Better
A good example of this could be with the British. They set upon India as a colonial masters to exploit ‘their’ colony, but ‘served’ the function of uniting Indians into a single country for the first time in 3,000 years. The British then built the infrastructure to support India as a (partially) functioning modern nation. Because of this, India is now on its way to becoming a global super power rather then 25 separate countries as they would have without the British intervention. This is not to justify either the feds or the British exploits, but it is to recognize that the bad can be transformed by time into serving a larger purpose of good. And so we have the final irony wherein Ron Paul was within reach of his victory charge of the Feds simply to find that the feds greatest leverage was in fact their most heroic act to save the US from total economic collapse. Such is the Lords sense of justice and humor for both parties.
In closing, the absence of falling wages as a factor to deflation is intentionally absent. Wages have a far smaller role to inflation then was true previously. This is in large part due to automation and other technological efficiencies that have reduced the over all cost to about 10% of most any given modern product (whether produced in the US or abroad). While we hear about the role of wage suppression to inflation, we fail to hear about the economic performance enhancements found by both higher wages as well as the economic empowered from both domestic and community development. We will cover that in our Golden Child edition.
All in all, this is simply a long winded narration to the many blessings we live as Americans while the world conspires to offer us yet again one more day of unparalleled privilege and miracle blessings as a nation. More then looking for ways to beat our odds is the advice of a man seeing mortality’s beginning flashes simmering in its approach and the call not of fear, but of thankfulness for the host of small joys and the abundance of gifts where miracles have become the American Way and the chance to meet our greatest challenges is some how always at our finger tips for the taking once we have the patience to hear and the heart to see the Divine’s glory in the life we have been allowed to live as Americans.