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Wednesday, September 25, 2013

The Fed’s QE poison pill and the rape of Lady Liberty

In simple terms the Federal Reserve is the governments banker. Though it has a relationship with the the government, e. g. it’s chairman is appointed by the president and approved by congress, it is not owned by the government, is not a government agency, it is in fact a privately owned bank. They named it the Federal Reserve in order to deceive the public.

Now, as a private bank whose interest do you think they serve? If it’s a choice between the governments interest and theirs, they are going to serve their own interest every time.

I won’t go into all the sordid details about the Fed in this post, read ‘The Creature From Jekyll Island’,  because I want to talk about one aspect, quantitative easing aka QE.

After the crash of 2007 and the failure of TARP, Cash for Clunkers, the multiple stimulus bills, etc., to heal the economy, the Fed decided to pump money into the economy to the tune of 85 billion dollars a month to allegedly ‘stimulate’ the economy. They said they were ‘easing’ the pain of a collapsed economy, thus the term: quantitative easing aka QE.

Where does this money come from? They just print it out of thin air. Where does it go? Basically it goes into the stock market. Since it is the rich who mostly owns stock it goes to the rich. Again where does it come from…out of thin air. That effectively means it comes out of mine and your pockets.

That 85 billion dollars a month has the effect of watering down the money supply so that the dollar loses value each time they put that 85 billion dollars into the economy, propping up the stock market and thereby increasing the wealth of the wealthy at the expense of the rest of us. To use an old phrase, ‘it’s highway robbery’ and all under the guise of helping the economy.

QE has had the effect of staving off an economic collapse because of the false confidence in the stock market. The markets were expecting the Fed to start tapering off of the easing at their last meeting and the markets dropped significantly at the prospect so the Fed decided to continue as is. Bernanke is on the way out and maybe just passed the buck to the next chairman.

Now they are trapped. Keep pumping the money into the economy until the other nations lose confidence in the dollar, as they surely will, and the economy collapses or stop the QE now and face the collapse now. Either way it’s going to happen. 

What can our leaders do when faced with the virtual certainty of economic collapse? There is nothing in the realm of ‘the normal’ they can do since 2 + 2 always = 4, the numbers don’t lie!

Kings used to solve this kind of problem by invading other nations, maybe they are planning on conquering other nations. Maybe that’s what the ‘new world order’ and ‘war on terror’ is all about. Who is behind the Arab Spring anyway? Obama claimed credit for it…

The Fed's 'hidden agenda' behind money-printing

By: Peter J. Tanous

Getty Images

The markets were surprised when the Federal Reserve did not announce a tapering of the quantitative easing bond buying program at its September meeting. Indeed, its signal to the market that it was keeping interest rates low was welcome, but there may be a hidden agenda.

Since it began in late 2008, QE has spurred a vigorous debate about its merits, both positive and negative.

On the positive side, the easy money and low interest rates resulting from quantitative easing have been a shot in the arm to the economy, fueling the stock market and helping the housing recovery. On the negative side, The Fed accomplished QE by "printing money" to buy Treasurys, and through the massive power of its purchases drove interest rates to record lows.

But in the process, the Fed accumulated an unprecedented balance sheet of more than $3.6 trillion which needs to go somewhere, someday.

But we know all this.

I believe that one of the most important reasons the Fed is determined to keep interest rates low is one that is rarely talked about, and which comprises a dark economic foreboding that should frighten us all.

The economy is stronger than it looks, said Dennis Gartman, The Gartman Letter, sharing his outlook on gold, the next Fed chairman and the fate of Treasury rates.

Let me start with a question: How would you feel if you knew that almost all of the money you pay in personal income tax went to pay just one bill, the interest on the debt? Chances are, you and millions of Americans would find that completely unacceptable and indeed they should.

But that is where we may be heading.

Thanks to the Fed, the interest rate paid on our national debt is at an historic low of 2.4 percent, according to the Congressional Budget Office.

Given the U.S.'s huge accumulated deficit, this low interest rate is important to keep debt servicing costs down.

But isn't it fair to ask what the interest cost of our debt would be if interest rates returned to a more normal level? What's a normal level? How about the average interest rate the Treasury paid on U.S. debt over the last 20 years?

That rate is 5.7percent, not extravagantly high at all by historic standards.

So here's where it gets scary: U.S. debt held by the public today is about $12 trillion. The budget deficit projections are going down, true, but the United States is still incurring an annual budget deficit by spending more than we take in in taxes and revenue.

The CBO estimates that by 2020 total debt held by the public will be $16.6 trillion as a result of the rising accumulated debt.

Do the math: If we were to pay an average interest rate on our debt of 5.7 percent, rather than the 2.4 percent we pay today, in 2020 our debt service cost will be about $930 billion.

Now compare that to the amount the Internal Revenue Service collects from us in personal income taxes.

In 2012, that amount was $1.1 trillion, meaning that if interest rates went back to a more normal level of, say, 5.7 percent, 85 percent of all personal income taxes collected would go to servicing the debt. No wonder the Fed is worried.

Some economists will also suggest that interest rates may go much higher than 5.7 percent largely as a result of the massive QE exercise of printing money at an unprecedented rate. We just don't know what the effect of all this will be but many economists warn that it can only result in inflation down the road.

As of today, interest rates are rising, and if this is a turning point, it is a major one.

Rates in the U.S. peaked in 1980 (remember the 14 percent Treasury bonds?) so if we are at the point of reversing a 33-year downward trend, who wants to predict how this will affect the economy?

One thing is clear: Based on CBO projections, if interest rates just rise to their 20-year average, we will have an untenable, unacceptable interest rate bill whose beneficiaries are China, Japan, and others who own our bonds.

And if Americans find out that the lion's share of their income tax payments are going to service the debt, prepare for a new American revolution.

Peter J. Tanous is president of Lepercq Lynx Investment Advisory in Washington D.C. He is the co-author (with Arthur Laffer and Stephen Moore) of The End of Prosperity (2008), and co-author (with's Jeff Cox) of Debt, Deficits, and the Demise of the American Economy (2011).

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