The fiscal crisis in the United States is near, and it won’t be pretty

By LUIS MIRANDA | THE REAL AGENDA | MARCH 5, 2013

When one hears talks about the collapse of the dollar, it is hard to picture how a currency that is the base of all global transactions can simply disappear. An important point to understand is that such a collapse does not occur at once. It takes a while to happen because that is how it has been arranged. What most people are clueless about is that, not only is the death of the dollar possible, but that it has already started.

Since the dollar became the world’s currency by design, the American currency has lost a great deal of value. According to the U.S. Bureau of Labor and Statistics, one dollar today is worth only about 5% of what the green back was worth back in 1913. More recent signs of the loss of relevance the dollar has had in the global economy is the fact that major commercial power houses –American commercial partners and foes– have officially adopted new ways to conduct commercial transactions. For example, China and Russia are now using their own currencies to deal with the purchase and sale of products. Another case is that of India and Japan. They have also resourced to their own currencies to carry out trade.

The dollar has not only lost value, but also credibility. The origin of the lack of trust on what once was the base currency on which every single product and service was priced –including gold– is the United States’ thirst for debt as a ‘development’ model. Today more than ever before, the American government depends on the issuance of debt as a way to keep up with its spending. For that reason, the country’s central bank, the Federal Reserve, has come up with all kinds of circus moves to slow down an outcome that seems imminent: the complete collapse of the U.S. dollar currency.

The influence of the Fed in the way the U.S. manages its debt to GDP ratio stems from the country’s inability to make payments on the cash it has borrowed from the Fed itself, as well as China and other foreign investors who own much of the American debt. The path chosen by the Fed to temporarily deal with the American inability to make payments on its debt –which continues to grow out of control with every passing day– is to make large purchases of government bonds and to use quantitative easing –the pumping of unlimited amounts of electronic money– in an attempt to make everyone feel good about the state of the economy.

The Fed’s intention is to make clear to the world that the U.S. has meaningful ways to prevent a default, because since all important transactions are carried out in dollars and the dollar is the world’s currency, the private central bank can issue fake money for as long as it wants. The obvious consequence of indefinitely pumping cash into the economy is hyperinflation, which has not happened because banks were ordered not to put the money they were given out into the market in the form of loans.

It seems that the Fed has everything figured out and that the collapse of the dollar will not come as soon as some economists have predicted, but the reality is very different. According to a study conducted by four prominent economists, it is almost crunch time for the Fed and the U.S. government. Right now, the least of the problems for the central bank and the American government is not lack of credibility, but a strong change of a fiscal crisis. The report was prepared by David Greenlaw, Managing Director and Chief U.S. Fixed Income Economist at Morgan Stanley; James D. Hamilton, Professor of Economics at University of California at San Diego and Research Associate of the National Bureau of Economic Research; Peter Hooper, Managing Director and Chief Economist, Deutsche Bank Securities Inc; and Frederic S. Mishkin, Alfred Lerner Professor of Banking and Financial Institutions, a Graduate of the School of Business at Columbia University and former Chairman of the Federal Reserve Bank.

What these four men found, is that the actions of the Federal Reserve caused massive inflation to a level where the dollar’s purchasing power has gone down in free fall . As the very same Federal Reserve policy books say, the goal is to devalue the currency by at least another 30 percent. The 89-page report states that reductions in fiscal revenues and excessive increase in government spending, the close relationship between sovereign debt and the levels of interests to be paid on the debt, a significant relation between debt loans and borrowing costs and the direct effects of the fiscal crises on monetary policy have been combined to render a single outcome: massive losses for countries and institutions such as the U.S. Federal Reserve that will exceed available capital.

What this means is that, if things continue business as usual, even the Fed will become unable to sustain the current fiscal crisis. According to the report, the Fed may enter unknown territory where the amount of debt created will exceed its capital holdings. What will happen when the Fed gets to its limit and can no longer maintain the current debt-based system? According to the authors, the more a country’s debt is held by foreigners the greater the political incentives for the government to default on that debt. This is what has been seen in developing countries. The day of reckoning for the Fed may come as early as 2016. If better fiscal and monetary policies are adopted, the disaster could be put off until 2018.

It is then necessary to remember who are the United States’ investors. As of December of 2012, the Federal Reserve System, which is a branch of the international banking cartel came up as first. In second place is China, with $1202.9 billion. After China, other countries like Japan, Brazil, Switzerland and Russia appear in third, fourth and fifth places. With the U.S. debt reaching and passing 100% of its GDP and the government borrowing and printing money as if it were going out of fashion, the only possible outcome is what we have seen in modern cases of fiscal irresponsibility.

Countries get in debt up to their eye balls to fulfill the promises made at home during by irresponsible politicians during political campaigns. Since the government does not have any money to actually pay for the expenses it creates, it is only ‘normal’ to get in debt to be able to meet demands for more social programs and to pay interests on old debt. But since the governments do not borrow locally, they subject their country, (i.e. the people) to having to work all their lives to make payments on the debt generated on the debt it has gotten into. The ability of a government to make debt payments is finite. Cases in point Argentina in 199o, Greece in 2008 to 2012, Portugal and Spain in 2013 and the looming fiscal crisis the United States will have to face in the near future.

The supposed programs to help nations pay their debt is nothing more than an attempt to slow the collapse of the global economy and the that assures foreign debt holders they will have enough time to loot the countries for all they have gotten. That is the ultimate form of payment used by the international banking cartel uses to recover their so-called investments. Different from Argentina, Greece, Portugal and Spain, it is hard to see how the Americans will allow the bankers to suck every drop of blood for not paying its debt, which is why negotiations have been held to find the least painful way to phase the dollar out. Although the bankers want every single penny back, they prefer to get it in the most peaceful way possible as supposed to having to face street protests as it has happened in Egypt, Libya, Syria, Argentina, Spain and Portugal.

In conclusion, the current system of debt creation as the base for development has reached the end of its life cycle. The consequences to come should the United States continue to print or issue fake money to pay its debt instead of cutting down spending and making big international corporations liable for evading the payment of corporate taxes, will make it impossible for the U.S. government to pay its debt and for the Fed to issue fake money to sustain the current system. The only reason the U.S. has not collapsed as a debtor nation is due to the demand for U.S. Treasuries at home and abroad, which has been maintained due to the dollar’s status as the world currency. That status however, is a subjective and ephimerous concept. The moment more nations decide to trade with their own currencies, or to set up sound monetary systems such as the one Muammar Gaddafi intended to create in Libya –the gold dinar–, the more credibility and trust the dollar will lose. Lack of trust and the impossibility to meet fiscal obligations will end up destroying the dollar.

As the authors put it simply, high debt leads to higher interest rates and higher debt. The high levels of debt reach a tipping point –fiscal crisis– in which the interest rate shoots up. In the case of the U.S. it has many of the possible triggers of that shoot up in interest rates and the only thing that is holding them from going through the roof is an imaginary belief that the U.S. is still that powerful economic entity that it appeared to be many years ago.

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Tokyo Injects Fiat Money while Beijing Talks about Bond Attack on Japan

By LUIS MIRANDA | THE REAL AGENDA | SEPTEMBER 19, 2012

The territorial conflict for the Senkaku/Diaoyu islands on the East China Sea have revealed two things in the last few days. First, China’s thirst to defeat its rivals in the region, despite American interventionism. Two, China will not necessarily use military weapons. Instead, it will use its economic might.

While the Japanese Central Bank announced it will follow on the steps of the American Federal Reserve and European Central Bank in flooding the market with money to keep its economy afloat, in Beijing the Communist Party led government is now considering attacking Japan by imposing sanctions on its main funding source: the sale of government bonds.

China is Japan’s main creditor today with holdings of over $230 billion in Japanese government issued bonds. This is China’s strongest weapon at the moment, or at least the one that the Chinese may use to obligate Japan to withdraw from the territorial dispute that has now called for the intervention of United States Defense Secretary Leon Panetta.

The most recent asset purchase program in Japan was extended by about 10 billion yen (€ 97,200 Mn), to 80 trillion yen (778 000 € Mn). In turn, the types of interest are maintained between 0 and 0.1%, a level at which they are since October 2010. The same policies are now being used by the United States Federal Reserve and the European Central Bank, which continue to facilitate funds to large financial institutions while denying loans to small and mid-size entrepreneurs.

The Bank of Japan opted, just like the Fed, to inflate its currency, by printing fiat money into the banking system in an attempt to revive the economy. As seen for the past 4 years, the insane policy of creating fiat money out of nothing does not work. In fact, it only prolongs the crisis because governments are not doing anything to kick start their economies.

The decision has favored the Nikkei, Japan’s stock market. Transactions closed with a rise of 1.19%. Stock markets are another tool in the rigged game that governments use to paint a colorful picture about otherwise dying economies, because they do not represent the actual state of those economies, but that of specific sectors. Stock prices, as in the case of Facebook, can be manipulated to show whatever the manipulators want to show.

The fake snowballing effect of the fiat money printing mechanism reached Europe, where the local markets received the news about the Japanese Bank injecting the worthless money into the economy as a good sign, which helped lift the markets.

In the meantime, in China, Jin Baisong, a member of the Chinese Academy of International Trade wrote on the China Daily newspaper that his government should “impose sanctions on Japan in the most effective manner” to bring Japan to its knees. He said China should consider invoke the security exception to punish Japan.

Other Chinese media such as the Hong Kong Economic Journal published an article about China’s plans to to cut off Japan’s supplies of rare earth metals which Japan needs to produce high tech consumer goods for local and international electronic giants. The considerations to punish Japan through credit lending, imposing cuts of raw materials and calling on international trade organizations to sanction Japan are three of the first steps China is considering to tame down the country’s intent to claim the Senkaku/Diaoyu islands as its property.

In the last two days, multiple protests exploded all over China against the Japanese which prompted many Japanese companies to close their doors for fear of retaliation.

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Lesson not Learned: The Fed Floods the Market with Fiat Money

By LUIS MIRANDA | THE REAL AGENDA | SEPTEMBER 14, 2012

Quantitative Easing is no longer an option for the private Federal Reserve and neither for the US. QE1 and QE2 did not avoid the fall of the United States, so QE3 did not make sense. Instead, Ben Bernanke has implanted a new fiat money manufacturing scheme I’d like to call Unlimited Easing.

In the same fashion that the European Central Bank is now able to buy unlimited amounts of debt from bankrupt countries like Spain, the Fed has given itself the prerogative to buy unlimited amounts of mortgage loans in an attempt to artificially lower interest rates and ‘stabilize’ the crashing home loan market. The $64 million question is how much will this unlimited easing help to rescue the mortgage market? Not much according to Ben Bernanke himself, who has said the move is not a panacea.

As some US media reported, the Fed once again pulled the trigger, but only to shoot the country on the other foot; an action that will certainly result in more difficult times for Americans. The U.S. Federal Reserve announced the ‘liquidity boost’ to help the economy and that such injection of fiat money will continue, which according to Ben Bernanke, shows the Fed’s commitment to help with the recovery. Double speak? Mind games?

At the end of their two-day meeting, the Fed said in a statement that it intended to “launch a program to buy mortgage-backed securities valued at $40 billion a month” and that the program would not have a limit in the amount spent or a deadline to conclude.

The organization led by Ben Bernanke said that if you add the “Operation Twist”, a program to swap short term bonds for long term ones, to the new scheme to buy mortgage backed securities, the Fed will be buying about $85 billion a month. Also, the U.S. central bank said it will keep interest rates at exceptionally low levels between 0% and 0.25%, until “at least mid-2015”, instead of the end of 2014 as announced in January of this year.

The Fed said that “highly accommodative monetary policy will remain appropriate for a considerable time until the economy strengthens.”

The chairman of the U.S. Federal Reserve (Fed), has defended the new measures adopted Thursday by the institution, while economists question the validity of a program that not even Bernanke sees as a real solution to the real problem. The chairman of the Fed insisted in his speech that his actions are not the “panacea” and “do not cure all ills” now affecting the economy.

In the press conference following the meeting of the Federal Open Market Committee (FOMC) of the Fed, Bernanke said that monetary policy alone — especially the wrong kind — will not solve all problems by itself, so politicians have to do their part. He also, emphasized that the Fed can not be rushed when leaving a highly accommodative monetary policy and pledged to hold such policy until the recovery is sustainable and allows for job creation.

However, he added that no set of policies can be extended until the objectives of his mandate are achieved. Those supposed goals include a significant improvement in employment, manufacturing and consumer spending. There is no need to say that under the current policies and the new ones the Fed has adopted, none of the goals will be ever accomplished. In fact, it is quite the opposite. The continuous unrestricted pumping of fake money into the economy will only prolong the disease.

Bernanke acknowledged that the situation in the labor market is still assessed as concerning, and stressed that the current level of economic recovery is not good enough to have the unemployment rate fall.

China Coming to a Bank Near Your

By VERONICA SMITH | AFP | MAY 10, 2012

The United States on Wednesday opened its banking market to ICBC, China’s biggest bank, for the first time clearing a takeover of a US bank by a Chinese state-controlled company.

Just days after high-level US-China economic talks in Beijing, the Federal Reserve approved an application from Industrial and Commercial Bank of China to buy a majority stake in the US subsidiary of Bank of East Asia.

The transaction will make ICBC the first Chinese state-controlled bank to acquire retail bank branches in the United States.

ICBC has been the most aggressive of China’s “big four” banks in expanding overseas.

According to the Fed the bank has total assets of roughly $2.5 trillion.

It will buy up to 80 percent of the US unit of the Hong Kong-based Bank of East Asia, which operates 13 branches in New York and California.

As part of the deal ICBC and two state-backed financial firms — China’s sovereign wealth fund the China Investment Corporation (CIC), and Central Huijin Investment — will be recognized as bank holding companies, regulated as commercial US banks.

The broad expansion of China’s footprint in the US market comes amid a series of financial reforms in China that could begin to open the lucrative market to US firms.

After the May 3-4 meeting, the US Treasury noted China had made “encouraging progress” on a number of issues sought by the Obama administration, including taking steps toward a more open and market-oriented financial system.

The Fed said Wednesday that the ICBC proposed acquisition, which is “relatively small,” would not have much of an impact on the banking market.

“The combined deposits of the relevant institutions in the Metropolitan New York banking market represent less than one percent of market deposits,” the central bank noted.

The competition includes Bank of China branches in the New York metropolitan area, and CIC, which has a noncontrolling stake in Morgan Stanley.

ICBC will pay $140 million to buy an 80 percent interest in Bank of East Asia USA, China’s state news agency Xinhua reported in January 2011, at the time the deal was signed.

“This unprecedented acquisition of a controlling stake in a US commercial bank by a mainland bank is strategically significant,” Xinhua quoted ICBC chairman Jiang Jianqing as saying.

The Fed said its Board also consulted with the China Banking Regulatory Commission, the country’s main banking regulator, and pointed to steady improvement in regulation since its founding in 2003.

“For a number of years, authorities in China have continued to enhance the standards of consolidated supervision to which banks in China are subject, including through additional or refined statutory authority, regulations, and guidance,” it said.

In other Fed board decisions, Bank of China, the third-largest bank, won approval for a branch in Chicago. Bank of China operates two insured federal branches in New York City and an uninsured branch in Los Angeles.

Agricultural Bank of China, the fourth-largest bank, was set to establish a branch in New York City, where it already operates a representative office.

Markets ‘Artificially’ Rally after FED and ECB Refill Bankers’ Pockets

By Scott Lanman
Bloomberg
November 30, 2011

The Federal Reserve cut the cost of emergency dollar funding for European banks as part of a globally coordinated central-bank response to the continent’s sovereign-debt crisis.

The interest rate has been reduced to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, and the program was extended to Feb. 1, 2013, the Fed said in a statement in Washington. The Fed will coordinate with the European Central Bank in the program, which was also joined by the Bank of Canada, Bank of England, Bank of Japan (8301), and Swiss National Bank. (SNBN)

The move is aimed at easing strains in markets and boosting the central banks’ capacity to support the global financial system, the statement said. The cost for European banks to fund in dollars rose to the highest levels in three years today as concerns about a possible breakup of the euro area increased after leaders said they’d failed to boost the region’s bailout fund as much as planned.

“When there’s concerted action by central banks, it’s definitely good,” said Jens Sondergaard, senior European economist at Nomura International Plc in London. “But are liquidity injections a game changer when the heart of the problem is in European sovereign debt markets?”

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

The dollar swap lines were previously set to expire Aug. 1, 2012. The new pricing will be applied to operations starting on Dec. 5.

Stocks Climb

European stocks extended their gains, the euro advanced against the dollar and Treasuries fell after the announcement. The Stoxx Europe 600 Index increased 2.2 percent to 236.66 at 1:19 p.m. in London. The euro rose to $1.3450 from $1.3317 late yesterday. The yield on the 10-year Treasury note climbed to 2.06 percent from 1.99 percent.

Separately, China two hours earlier cut the amount of cash that banks must set aside as reserves for the first time since 2008. The level for the biggest lenders falls to 21 percent from a record 21.5 percent, based on past statements.

The Frankfurt-based ECB, which says it is up to governments to stem the two-year-old debt crisis, unexpectedly cut its benchmark interest rate Nov. 3 as the turmoil threatens to drag the euro area into recession.

Refinancing Operation

Yesterday the ECB allotted the most to banks in its regular seven-day refinancing operation in more than two years, lending 265.5 billion euros. The ECB offers unlimited funding to euro- area banks against eligible collateral.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the statement said.

Under the dollar liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process.

The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened. The Fed three months earlier had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007.