Monday, October 18, 2010

The Loss of Trust and the Great Unraveling To Come

The political class and Standard-Issue Punditry (SIP) don't "get it": Americans have completely lost faith in their Financial Elites and government, for abundantly obvious reasons.










The story here is complex and interconnected, and in the days ahead I will endeavor to trace it out in a coherent manner.

As a brief sketch: Bernanke and the Fed are playing an unprecendented game on two tables at once. The games are interconnected: one is the domestic economy and the other is the global economy.

Here's the Fed's game plan in each game. In the domestic economy, the Fed aims to save its Overlords in the banking sector by giving them unlimited credit at zero interest (ZIRP). The banks are free to speculate with this money and earn a higher return. This dynamic--unlimited free money at zero interest--is designed to let the banks "earn" their way of their insolvency.

But that zero interest policy is robbing the citizenry of hundreds of billions of dollars annually. Banks were once required to pay 5.25% interest on all savings accounts. People who saved for retirement could expect to earn at least that on their capital. Thanks to the giveaway to the banks, they now earn basically nothing.

Zero interest is nothing but a transfer of wealth from the citizens to the Financial Power Elites in the money-center and investment banks. Please note the bankers divided up $144 billion in bonuses last year, despite their insolvency. That buys a lot of politicos--basically all of them.

Secondly, the Fed is destroying the nation's currency, the dollar, to drive money into the stock market. This is designed to create a facade of "prosperity" which gives some sort of credence to the government's claim that a "recovery" is underway. Since the Grand Stimulus has failed utterly and completely, then juicing the stock market is the only way left to bolster the illusion of "recovery."

Unfortunately for the incompetent toadies of the Fed, much of the "hot money" speculation they have incentivized is flowing into commodities, driving up the prices of food and fuel. Once again the Fed has engineered a policy which siphons money away from the citizenry in order to reward and enrich the Financial Power Elites.

While the dollar has plummeted since June, the stock market has raced ever higher, creating over $1 trillion in "new wealth" for the top 1% who owns most of the equities. The consequences of this irresponsible destruction of the dollar (via ZIRP and Quantititive Easing--QE2) are now apparent: commodities such as sugar and corn are skyrocketing everywhere in the world.

Recall that the U.S. is still roughly a third of the global GDP, and while $1 trillion has been "normalized" in the U.S. it is still a gargantuan sum fully capable of distorting any commodity market on the planet. As the Fed's trillions flow into private hands seeking speculative yields anywhere and everywhere, then "inflation"--price increases driven not by supply issues but by speculative demand for yield and "real goods"--is rising everywhere.

In a global market, the price of corn rises everywhere as the grain flows to the highest prices being paid.

The Fed is seeking a two-fer by destroying the dollar: it hopes to make U.S. goods cheap enough on the global market to boost exports. The Fed's rapid depreciation of the dollar has sparked a "currency war" in which other nations are watching their own currencies rise to the point that their own exporters can no longer make a profit.

It is widely known that Japan's exporters cannot turn a profit on U.S. sales if the Japanese yen drops below 90 to the dollar. It is now around 81. Japan's exporters will either lose vast sums or they will have to raise prices in the U.S.

The same can be said of other currencies being driven higher against the dollar.

The U.S. is in effect wielding the dollar, still the world's reserve currency, as a weapon to pound down everyone else's profitability.

But wait--there's more! Nations which are running trade surpluses with the U.S. have surplus dollars, and as the Fed destroys the dollar then those holdings are losing value. In terms of retaining liquidity and some measure of safety, buying U.S. Treasuries is practically the only game in town.

So exporting nations are funding the Fed's zero-interest policy by buying U.S. bonds, even as the Fed depreciates the value of their holdings. Talk about a rigged game.

The wild-card currency is the Chinese yuan, as it is a proxy for the U.S. dollar.Since the yuan is pegged to the dollar (6.8 to $1), then all these machinations of the Fed don't change the yuan's value. This is a frustration for the U.S., so the political lapdogs have been engaged to yap and bark noisily, demanding a devaluation in the yuan.

Weirdly, perhaps, the declining dollar is actually a plus for China, as its goods are now cheaper in Europe and Japan: as the dollar falls against other currencies, so too does the yuan.

This sort of currency hegemony is wearing thin around the world. So the Fed is not only perfectly happy to impoverish Americans via skyrocketing commodity prices and rising import prices, its dollar-destruction policies are driving the rest of the world into creating another reserve currency. The "free ride" the U.S. has enjoyed as holder of the only reserve currency will end, and the nation will have to live within its means.

The Fed's incompetence and ownership by the Financial Power Elites is painfully obvious. Which is more pernicious and destructive hardly matters, but it seems its incompetence adds a positive feedback to its servitude to the bankers.

Was propping up the stock market to give the ruling politicos a boost on November 2 worth the destruction of the dollar? Obviously not.

If they haven't already lost faith in the Federal Reserve, the citizenry soon will. They have already lost trust in the Federal government and the political lapdogs who occupy the seats of power. The Great Unraveling has just begun, and there is much more to come.




Thank you, Dominic M. ($50), for your astonishingly generous contributions to this site-- I am honored by your ongoing support and readership. Thank you, John L. ($25), for your most generous contribution to this site-- I am honored by your support and readership.

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