***
Fractional reserve banking, conjuring what they claim is 'money,' but
that which is really debt (since there is nothing of inherent value
backing it), from thin air, leveraging it up by many multitudes,
getting a nation to endorse it as monopolistic fiat (and enforce the
monopolistic recognition of it as such), is the problem.
If 95% of loans go bad (or more), the fractional reserve bankers lose nothing. They created this fiat money from nothing and received the protection of the nation in distributing fiat monopoly currency. Not
only do they lose nothing, they actually gain any real assets that
were pledged as collateral to securitize most of the loans that went
'bad' - Harvest. Repeat this process of Harvest by first inflating the
money supply, getting people deeply indebted (many of whom weren't
indebted before), and soon enough, with enough cycles of harvest, what
belonged to many will be concentrated in the hands of a few, all via
the sham that is fractional reserve banking. It's the biggest scam in the history of mankind.
Once a person grasps this basic concept, they'll understand why
events have taken place as they have (Bretton Woods*; Plaza Accord;
Federal Reserve Act of 1913; closing of the gold standard in 1971*,
etc.), and they'll finally grasp how a select few have rigged the game
to be able to harvest assets continually, and concentrate wealth and
power, by doing nothing other than maintaining Deep Capture of a
nation's legislative and judiciary branches (and executive, in the case
of the U.S.) of government. *On August 15, 1971, the United States unilaterally
terminated convertibility of the dollar to gold. As a result, "[t]he
Bretton Woods system officially ended and the dollar became fully fiat
currency, backed by nothing but the promise of the federal
government." This action, referred to as the Nixon shock, created the
situation in which the United States dollar became the sole backing of
currencies and a reserve currency for the member states. At the same
time, many fixed currencies also became free floating.
If you could print a currency at no cost, that had no instrinsic
value, and get the legal system to recognize it as the only legally
permissibly 'tender' to satisfy all debt, public and private, would you
print as much as you could, loan it out to as many entities and people
as you could, and sit back, not caring whether 90% or 9% of the loans
were repaid, since it cost you nothing to produce the loan, meaning that
you can only gain assets (securitized) and indebt institutions (create
indebted parties that you can then garnish), and literally lose not
one atom of anything of inherent value?
Further, if you had access to an entity that could do the above, and
you could borrow that currency at absurdly low interest rates, and
moreover, you had an express or at least implicit taxpayer guarantee
against losses (too big to fail), would you also not do exactly the
same?
If you're the former entity, you literally can lose nothing, no matter how reckless your actions or lending standards.
If you're the latter party, your risk of loss is inconsequential,
since you're backed by the taxpayers (involuntarily), and even if you
weren't, if you're a very large entity able to tap absurdly low interest
loans from the former, unless you are galactically idiotic on a level
that equals Lehman or beyond (where derivatives did them in, along with
a non-bailout), you'd be hard pressed to lose money if even -
completely hypothetical and arbitrary % - 20% of the cheap interest
money you borrowed and then re-loaned out wasn't paid back to you.
If you're the former, you have not only no risk, but you can't possibly lose anything, since your investment is nothing.
If you're the latter, your risk is incredibly small.
This is why our economy, under fractional reserve banking practices,
using currency created from thin air, tied to absolutely nothing of
inherent value, and bestowed monopoly status as legal tender, is a
factual, literal Ponzi Scheme.
This is why we had to close the gold standard, lest we couldn't show
"growth" (even though it was merely nominal, credit/debt based
transactions) in our official GDP going forward.
You don't even have to tie the fiat to gold in order to force the
economy to produce honest numbers and detect the real level of economic
growth or contraction: tie the currency to anything that has inherent
value, and that can be stored, and that isn't infinite in quantity.
The mind bender part for the newly initiated (as I was at one time)
to the Matrix is that there's no real 'debt' from the perspective of the
fractional reserve central bank; it's hard for those steeped in
conventional economics to rip out the notion from their brain that the
fractional reserve central bank can't lose anything (they didn't lend
anything of value or that cost them anything - they have ZERO skin in
the game), and that their favored entities that are TBTF have only
slightly less risk (because they will always be able to socialize their
losses via taxpayer bailouts in the wake of busts, while they retain
their ill-gotten gains during the booms), and that what most refer to as
debt in this system is only a liability for the debtor. If the debtor
doesn't repay what was they borrowed (a monopoly currency that cost the
lender nothing to produce), they can lose their farm, construction
equipment, home, machinery, infrastructure, vehicle, etc. that was used
to securitize or collateralize the loan, or even if the loan was
unsecuritized, they can at least see their revenue or wages garnished,
be sent into involuntary bankruptcy (where their general pool of assets
will be seized upon by creditors, including lenders), and squeezed in
other ways.
The only way to avoid this is to not play the game. During crack up
booms, you miss out on fiat-based gains, if you don't play the game, and
the incentive for playing that game is that if your timing is correct,
you can get rid of all debt and convert the excess fiat gains into
hard assets having inherent value or other things of inherent value,
before the fractional reserve alchemists induce another
inflationary-deflationary (or vice-versa) harvest.
If one were fortuitous enough to play the game, and have the skill
and/or luck to convert fiat gains into real wealth before the boom turns
to bust, they'd probably be idiotic to repledge their real wealth
assets as collateral for loans ever again (I say probably, because there
are exceptions to every general rule, but these people would have to
be extremely smart, competent and or connected to the alchemists in
such a way that they'd be assured a bailout in the event of another
bust whereby their real assets are pledged as collateral for fiat
loans).
The Harvest is the end game for the fractional reserve bankers and their minions. As just one example
of the rape that is harvest, even generations of families that were
land rich (let's say a family that has owned two square miles of prime
farmland yielding high value crops for three generations, carrying no
debt) can find that an economic downturn suddenly forces them to take
the step of obtaining a loan, pledging their farm and equipment as
collateral, in the belief that the loan will allow them to survive the
downturn and become more profitable at some future point - they're now
'harvestable.'
By pledging real assets to secure a loan of fiat money (conjured from
thin air at no cost), one is playing right into the hands of The Money Masters.
US officials say this every time there's a public discussion that
could limit their authority. US officials also provide misleading or
directly false assertions about the value of these programs, as they did
just recently with the Zazi case, which court documents clearly show
was not unveiled by PRISM.
Journalists should ask a specific question: since these programs
began operation shortly after September 11th, how many terrorist attacks
were prevented SOLELY by information derived from this suspicionless
surveillance that could not be gained via any other source? Then ask how
many individual communications were ingested to acheive that, and ask
yourself if it was worth it. Bathtub falls and police officers kill more
Americans than terrorism, yet we've been asked to sacrifice our most
sacred rights for fear of falling victim to it.
Further, it's important to bear in mind I'm being called a traitor by
men like former Vice President Dick Cheney. This is a man who gave us
the warrantless wiretapping scheme as a kind of atrocity warm-up on the
way to deceitfully engineering a conflict that has killed over 4,400 and
maimed nearly 32,000 Americans, as well as leaving over 100,000 Iraqis
dead. Being called a traitor by Dick Cheney is the highest honor you can
give an American, and the more panicked talk we hear from people like
him, Feinstein, and King, the better off we all are. If they had taught a
class on how to be the kind of citizen Dick Cheney worries about, I
would have finished high school.
*** It is dangerous to be right in matters on which the established authorities are wrong. -Voltaire
Patriotism is supporting your country always -- and your government when they deserve it. Mark Twain
"Truth is treason in the empire of lies". -Ron Paul
NLP = Neuro Linguistic Programming: A propaganda technique using
subliminal cues to confuse and influence the target of your propaganda.
(the public) Most people are effectively continually hypnotized.
Behold the definition of a "revolving door" - Judd Gregg: from US Senator, to Goldman Sachs advisor, to SIFMA head, all in under two years. The SIFMA press release proudly announcing its new head. Oddly, zero mentions of "Goldman Sachs":
The Securities Industry and Financial Markets Association (SIFMA)
today announced the appointment of former three-term U.S. Senator Judd
A. Gregg as Chief Executive Officer of the Association and the
appointment of former U.S. Representative and SIFMA Acting President
& CEO Kenneth E. Bentsen, Jr. as President of the Association.
“Judd’s experience as both a governor and legislator will be
of tremendous value to SIFMA in bridging the gap between the
complexities of the financial markets and the positive impact our
markets have on every community across America,” said Chet
Helck, SIFMA Chair and CEO Global Private Client Group at Raymond James
Financial. “Judd and Ken, who has proven himself as an outstanding
member of SIFMA’s senior management, are the right team to lead SIFMA in
our important mission of ensuring trust in our financial markets,
fostering an understanding of the important role efficient capital
markets play in the life of every American working and living across the
country and demonstrating the positive impact the financial services
industry has on economic growth and job creation.”
“Judd is a national leader and a respected voice on financial regulatory and economic issues,” said
Jim Rosenthal, Chair-Elect of SIFMA and Chief Operating Officer at
Morgan Stanley. “As SIFMA focuses on increasing trust and confidence in
the financial markets and allowing that confidence to grow and create
jobs, I can’t envision a better team than Judd and Ken to lead us.
I feel more confident in the Association’s ability to communicate
effectively at every level – to the government, to regulators,
internationally and, most important, to the people who look to financial services to help them achieve their goals.”
Senator Gregg was the ranking Republican member on the
Appropriations; Banking, Housing and Urban Affairs; and Health,
Education, Labor and Pensions Committees. Prior to joining the U.S.
Senate, he served two terms as governor of New Hampshire and four terms
as a member of the U.S. House of Representatives. Senator Gregg
currently serves as a Co-Chair of the bi-partisan Campaign to Fix the
Debt and served on the National Commission on Fiscal Responsibility.
Senator Gregg holds a Juris Doctor and Master of Laws from Boston
University and a Bachelor of Arts in English from Columbia University.
“It is an honor to join SIFMA as CEO. America’s success and
prosperity depends on a vibrant financial system providing access to
capital and credit that helps people on Main Streets across America
build on their dreams of opening a small business, saving to be able to
send their children to college, buying their first home or saving for
retirement,” Gregg said. “At the center of this financial system is the
membership of SIFMA. Our members provide the resources and expertise
that make the economic engine of America work and create a more
prosperous life for Americans. We are facing a great many challenges and
I look forward to working with legislators and regulators together as
we improve our economy and the lives of our citizens.”
Mr. Bentsen has served as Executive Vice President of Public Policy
and Advocacy since 2009 overseeing SIFMA’s legal, legislative and
regulatory affairs and served as a leading industry voice. Prior to
joining SIFMA, Mr. Bentsen was president of the Equipment Leasing and
Finance Association (ELFA). From 1995 to 2003, Mr. Bentsen served as a
Member of the U.S. House of Representatives from Texas, where he sat on
the House Financial Services Committee (and its predecessor House
Banking and Financial Services Committee), and separately on the House
Budget Committee. Prior to his service in Congress, Mr. Bentsen was an
investment banker at a major Wall Street firm and a large regional firm,
where he specialized in municipal and mortgage finance. Mr. Bentsen has
a B.A. from the University of St. Thomas and an M.P.A. from American
University.
“SIFMA is the leading trade association for the capital markets
business with an outstanding member base and dedicated employee team,”
Bentsen said. “Judd Gregg will bring a strong voice and
leadership to underscoring the role of finance in fostering capital
formation, wealth creation and jobs and economic development in the
United States. I look forward to working with Judd and our
members as we promote effective and efficient markets, at home and
abroad, to finance a growing American economy.”
* * * *
What's even more funny (not really) is the floor speech Gregg made in 2009 at Ben Bernanke's confirmation where he basically gave him a blow job in front of the American people. Would you care to see how this slimeball sucked off Bernanke?
“Good as Money,” proclaimed the ad for Twenty Grand Cognac.
Being a beer drinker, and never having cashed in a Budweiser to pay for a
fill-up at the local gas station, I said to myself “Man, that must be
really good stuff!” Even in a financial meltdown I thought, you could
use it in place of cash, diamonds, gold or Bitcoins! And if the Mongol hordes descend upon us during a future revolution, who wouldn’t prefer a few belts of Twenty Grand on the way out, instead of some shiny rocks and a slingshot?
Well, not being inebriated at that moment I immediately shifted focus to a more serious topic. What IS
money? A medium of exchange and a store of value is a rather succinct
definition, but we generally think of it as cash or perhaps checks that
reflect some balance of “ready” cash at a friendly bank. Yet as
technology and financial innovation have progressed over the past few
decades, and as central banks have tenuously validated the liquidity and
price of various forms of credit, it seems that the definition of money
has been extended; not perhaps to a bottle of Twenty Grand Cognac,
but at least to some other rather liquid forms of near currency such as
money market funds, institutional “repo” and short-term Treasuries
“guaranteed” by the Fed to trade at par over the next few years.
All of the above are close to serving as a “medium of exchange”
because they presumably can be converted overnight at the holder’s whim
without loss and then transferred to a savings or checking account. It
has been the objective of the Fed over the past few years to make even
more innovative forms of money by supporting stock and bond prices at
cost on an ever ascending scale, thereby assuring holders via a “Bernanke put” that they might just as well own stocks as the cash in their purses. Gosh, a decade or so ago a house almost became a money substitute. MEW – or mortgage equity withdrawal –
could be liquefied instantaneously based on a “never go down” housing
market. You could equitize your home and go sailing off into the sunset
on a new 28-foot skiff on any day but Sunday.
So as long as liquid assets can hold par/cost with an option to
increase in price, then these new forms of credit or equity might be
considered “money” or something better! They might therefore represent a
“store of value” in addition to serving as a convertible medium of
exchange. But then, that phrase “Good as Money” on the cognac bottle
kept coming back to haunt me. Is all this newfangled money actually
“money good?” Technology and Fed liquidity may have allowed them to
serve as modern “mediums of exchange,” but are they legitimate “stores
of value?” Well, the past decade has proved that houses were merely
homes and not ATM machines. They were not “good as money.” Likewise, the
Fed’s modern day liquid wealth creations such as bonds and stocks may
suffer a similar fate at a future bubbled price whether it be 1.50% for a
10-year Treasury or Dow 16,000.
But let’s not go there and speak of a bubble popping. Let’s perhaps more immediately speak about current and future haircuts when we question the “goodness of money.” Carmen Reinhart has
said with historical observation that we are in an environment where
politicians and central bankers are reluctant to allow write-offs:
limited entitlement cuts fiscally, no asset price sink holes monetarily.
Yet if there are no spending cuts or asset price write-offs,
then it’s hard to see how deficits and outstanding debt as a percentage
of GDP can ever be reduced. Granted, the ability of central
banks to avoid a debt deflation in recent years has been critical to
stabilizing global economies. And too, there have been
write-offs, in home mortgages in the U.S., for example, and sovereign
debt in Greece. But the cost of these strategies, which avoid what I
simplistically call “haircuts,” has been high, and their ability to
reduce overall debt/GDP ratios is questionable. Chairman Bernanke has
admitted that the cost of zero-bound interest rates, for instance,
extracts a toll on pension funds and individual savers. Some of his Fed
colleagues have spoken out about the negative aspects of QE and future
difficulties of exit strategies should they ever take place. (They
won’t!) So current policies come with a cost even as they act to
magically float asset prices higher, making many of them to appear “good
as money” – shots of cognac notwithstanding.
But the point of this Outlook is that even IF… even IF QEs
and near zero-bound yields are able to refloat global economies and
generate a semblance of old normal real growth, they will do so
utilizing historically tried and true “haircuts” that rather
surreptitiously “trim” an asset holder’s money without them really
knowing they had entered a barbershop. These haircuts are hidden
forms of taxes that reduce an investor’s purchasing power as
manipulated interest rates lag inflation. In the process, governments
and their central banks theoretically reduce real debt levels as well as
the excessive liabilities of levered corporations and households. But
they represent a hidden wealth transfer that belies the vaunted phrase
“good as money.”
Before drinking up, let’s examine these haircuts to see why they do
not represent an authentic store of value even if their bubbly prices
never pop. I will give each haircut a symbolic name – I welcome your
suggestions as well via e-mail reply: outlook@pimco.com (1) Negative Real Interest Rates – “Trimming the Bangs”
During and after World War II most countries with high debt overloads
resorted to artificially capping interest rates below the rate of
inflation. They forced savers to accept negative real interest rates
which lowered the cost of government debt but prevented savers from
keeping up with the cost of living. Long Treasuries, for instance, were
capped at 2½% while inflation was soaring towards double-digits. The
resulting negative real rates together with an accelerating
economy allowed the U.S. economy to lower its Depression-era debt/GDP
from 250% to a number almost half as much years later, but at a cost of
capital market distortions.
Today, central banks are doing the same thing with near zero-bound
yields and effective caps on higher rates via quantitative easing. The
Treasury’s average cost of money is steadily grinding lower than 2%. If
current policies continue to be enforced in future years it will
eventually be less than 1% because of the inclusion of T-bill and short
maturity financing. The government’s gain, however, is the
saver’s loss. Investors are being haircutted by at least 200 basis
points judged by historical standards, which in the past offered no QE
and priced Fed Funds close to the level of inflation. Large
holders of U.S. government bonds, including China and Japan, will be
repaid, but in the interim they will be implicitly defaulted on or
haircutted via negative real interest rates. Are Treasuries money good? Yes. But are they good money? Most assuredly not, when current and future haircuts are considered. These rather innocuous seeming (-1%) and (-2%)
real rate haircuts are not a bob or a mullet in hairstyle parlance.
More like a “trimming of the bangs.” But at the cut’s conclusion,
there’s a lot of hair left on the floor. (2) Inflation / Currency Devaluation – “the “Don Draper”
Inflation’s sort of like your everyday “Mad Men – Don Draper” type of
haircut. It’s been around for a long time and we don’t really give it a
second thought except when it’s on top of a handsome head like Jon
Hamm’s. 2% ± a year – some say more – but what the heck, inflation’s
just like breathing air … you just gotta have it for a modern-day
levered economy to survive. Sometimes, though, it gets out of control,
and when it is unexpected, a decent size hit to your bond and stock
portfolio is a possibility. If our TV idol Don Draper lives another
decade or so on the airwaves, he’ll find out in the inflationary 70s.
Such was the example as well in the Weimar Republic in the 1920s and in
modern day Zimbabwe
with its One Hundred Trillion Dollar bill shown below. As central banks
surreptitiously inflate, they also devalue their currency and
purchasing power relative to other “hard money” countries. Either way –
historical bouts of inflation or currency devaluation suggest that your
investment portfolio may not be “good as the money” you might be banking
on.
(3) Capital Controls – the “Uncle Sam Cut”
Uncle Sam with his rather dapper white hair and trimmed beard serves
as a good example for this type of haircut, if only to show that even
the U.S. can latch on to your money or capital. Back in the 1930s, FDR
instituted a rather blatant form of expropriation shown above. All
private ownership of gold was forbidden (and subject to a $10,000 fine
and 10 years in prison!) if it wasn’t turned into the government. Today
we have less obvious but similar forms of capital controls – currency pegging
(China and many others), taxes on incoming capital (Brazil) and
outright taxation/embargos of bank deposits (Cyprus). Governments use
these methods to keep money out or to keep money in, the net result of
which is a haircut on your capital or your potential return on capital.
Future haircuts might even include a wealth tax. Are gold and/or AA+
sovereign bonds good as money? Usually, but capital controls can clip
you if you’re not careful.
(4) Outright Default – the “Dobbins”
Ah, here’s my favorite haircut, and I’ve named it the “Dobbins” in
honor of this 5-year bond issued in the 1920s with a beautiful gold seal
and payable, in dollars or machine guns! Bond holders got
neither and so it represents the historical example of the ultimate
haircut – the buzz, the shaved head, the “Dobbins.” As suggested
earlier, the objective of central banks is to prevent your portfolio
from resembling a “Dobbins.” I have tweeted in the past that the Fed is
where all bad bonds go to die. That is half figurative and half literal,
because central banks are typically limited from purchasing bonds
payable in machine guns or subprime mortgages (there have been
exceptions and Bloomberg reported that nearly 25% of global central
banks are now buying stocks believe it or not)! But by purchasing
Treasuries and Agency mortgages they have rather successfully incented
the private sector to do their bidding. This behavior reflects the
admission that modern-day developed economies are asset-priced
supported. Unless prices can continuously be floated upward, defaults
and debt deflation may emerge. Don’t buy a Dobbins bond or a
Dobbins-like asset or a bond from a country whose central bank is buying
stocks. They probably aren’t “good as money!”
Investment Strategy
So it seems as if the barber has you cornered, doesn’t it? Sort of like Sweeney Todd!
Let’s acknowledge that possibility, along with the observation that all
of these haircuts imply lower-than-average future returns for bonds,
stocks, and other financial assets. If so, the rather mixed metaphor of
“money’s goodness” and “avoiding haircuts” is still the question of our
modern investment age. The easiest answer to the question of what to buy
is to simply take your ball and go home. If the rules aren’t fair,
don’t play. That endgame however, results in a Treasury bill rate of 10
basis points or a negative yield in Germany, France and Northern EU
markets. So a bond and equity investor can choose to play with
historically high risk to principal or quit the game and earn nothing.
PIMCO’s advice is to continue to participate in an obviously
central-bank-generated bubble but to gradually reduce risk positions in
2013 and perhaps beyond. While this Outlook has indeed claimed
that Treasuries are money good but not “good money,” they are better
than the alternative (cash) as long as central banks and dollar reserve
countries (China, Japan) continue to participate.
The same conclusion applies to credit risk alternatives such as
corporate bonds and stocks. Granted, this sounds a little like Chuck
Prince and his dance floor metaphor does it not? His example proved that
dancing, and full heads of hair are not forever. So give your own
portfolio a trim as the year goes on. In doing so, you will give up some
higher returns upfront in order to avoid the swift hand of Sweeney
Todd. There will be haircuts. Make sure your head doesn’t go with it.
Quick Read
1) Central banks and policymakers are acting like barbers. They haircut your investments.
2) Negative real interest rates, inflation, currency devaluation,
capital controls and outright default are the barber’s scissors.
3) Gradually reduce duration, risk positions and “carry” as the year proceeds.
William H. Gross Managing Director
