The Axis of Greed

The Nature and Structure of the Economic Elite

“The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies, all who question its methods or throw light upon its crimes… As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money powers of the country will endeavor to prolong it’s reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed. Abraham Lincoln



U.S. Elite

Institutions:

Federal Reserve

Business Council

Bilderberg Group

Conference Board

Brookings Institute

Advertising Council

Heritage Foundation

Trilateral Commission

Business Round Table

Chamber of Commerce

Federal Trade Commission

Council on Foreign Relations

American Petroleum Institute

American Enterprise Institute

American Bankers Association

Pharm Research & Manufacturers

Public Relations Society of America

American Psychological Association

Project for a New American Century

Securities and Exchange Commission

Committee for Economic Development

National Association of Manufacturers

Carnegie / Ford / Rockefeller foundations

Military / Media / Prison Industrial Complex

I don’t view the Economic Elite as a small group of men who meet in secrecy to control the world. They do feature elements of conspiracy and are clearly composed of secretive organizations like the Bilderberg Group - this is not a conspiracy theory, this is a conspiracy fact - but as a whole the Economic Elite are primarily united by ideology. They’re made up of thousands of individuals who subscribe to an ideology of exploitation and the belief that wealth and resources need to be concentrated into the fewest hands possible (theirs), at the expense of the many.

That being said, there are some definite lead players in this group and it is important that we are not too vague and expose the individuals who publicly lead them. Focusing on the fundamental structure of the US economy, we have people like Hank Paulson, Tim Geithner, Ben Bernanke, Robert Rubin, Larry Summers, Alan Greenspan, Lloyd Blankfein, Jamie Dimon, John Mack, Vikram Pandit, John Thain, Hank Greenberg, Ken Lewis, John J. Castellani, Edward Yingling and Tom Donohue.

In total, the Economic Elite are made up of about 0.5% of the US population. At the center of this group is the Business Roundtable, an organization representing Fortune 500 CEOs that is also interlocked with several lead elite organizations. Most Americans have never heard of the Business Roundtable. However, in my analysis, it is the most influential and powerful Economic Elite organization.

“The Business Roundtable joined the Business Council at the heart of both the corporate community and the policy-formation network and now has the most powerful role…. The Roundtable’s interlocks with other policy groups and with think tanks are presented [below].

” G. William Domhoff, Who Rules America?

The Roundtable’s first year of operation was 1972, which coincided with the beginning of the CEO salary explosion, and has been the driving force behind the unprecedented concentration of wealth since their inception. Their dominance over the US economy and government is unparalleled. Their members are a Who’s Who of everything that is wrong with our economy. Here is a partial list of some of their lead members:

——-Lloyd C. Blankfein, Goldman Sachs

——-James Dimon, JPMorgan Chase & Co.

——-James P. Gorman, Morgan Stanley

——-Vikram S. Pandit, Citigroup, Inc.

——-Brian T. Moynihan, Bank of America

——-Brendan McDonagh, HSBC

——-Robert W. Selander, MasterCard Incorporated

——-Kenneth I. Chenault, American Express Company

——-Rupert Murdoch, News Corporation

——-Glenn A. Britt, Time Warner Cable Inc.

——-Philippe Dauman, Viacom, Inc.

——-Jeffrey R. Immelt, General Electric Company

——-Brian L. Roberts, Comcast Corporation

——-Steven A. Ballmer, Microsoft Corporation

——-John T. Chambers, Cisco Systems, Inc.

——-Randall L. Stephenson, AT&T Inc.

——-Ivan G. Seidenberg, Verizon Communications

——-David G. DeWalt, McAfee, Inc.

——-Steven R. Loranger, ITT Corporation

——-Paul T. Hanrahan, AES Corporation, The

——-Riley P. Bechtel, Bechtel Group, Inc.

——-W. James McNerney , Boeing Company, The

——-Rex W. Tillerson, Exxon Mobil Corporation

——-Marvin E. Odum, Shell Oil Company

——-John S. Watson, Chevron Corporation

——-James J. Mulva, ConocoPhillips

——-John B. Hess, Hess Corporation

——-James E. Rogers Duke Energy Corporation

——-J. Larry Nichols, Devon Energy Corporation

——-Ronald A. Williams, Aetna Inc.

——-David Cordani, CIGNA

——-Jeffrey B. Kindler , Pfizer Inc.

——-Angela F. Braly, WellPoint, Inc.

——-John C. Lechleiter, Eli Lilly and Company

——-Edward B. Rust, Jr., State Farm

——-Andrew N. Liveris, Dow Chemical

——-James W. Owens, Caterpillar Inc.

——-Ellen J. Kullman, DuPont

——-Edward E. Whitacre Jr., General Motors Company

——-Michael T. Duke, Wal-Mart Stores, Inc.

The Business Roundtable is the most powerful activist organization in the United States. Their leaders regularly lobby members of Congress behind closed doors and often meet privately with the President and his administration. Any legislation that affects Roundtable members has almost zero possibility of passing without their support.

For three major examples, look at healthcare and financial reform, along with the military budget. The healthcare reform bill devolved into what amounts to an insurance industry bailout and was drastically altered by Roundtable lobbyists representing interests like WellPoint, Aetna, Cigna, Pfizer, Eli Lilly and Johnson & Johnson. Obama and Congress are trying to please the Roundtable with a bill that supports their interests. This led to the dropping of the public-option put forth in the House bill. However, when it came to finishing the bill, Roundtable members began to walk away from the process. That’s the real reason why the reform bill has stalled. Obama will be meeting with the Roundtable on February 24th, in hopes of getting healthcare reform back on track. After that meeting, he will then hold a bipartisan healthcare meeting with members of congress.

Also being addressed in Obama’s upcoming meeting with the Roundtable are issues concerning financial reform. Almost every aspect of financial reform has been D.O.A. thanks to Roundtable lobbyists representing the interests of Goldman Sachs, JP Morgan, Morgan Stanley, Citigroup, Bank of America, HSBC, Master Card and American Express. They even pushed to make sure Ben Bernanke was reconfirmed as the head of the Federal Reserve and they have also guided Obama into focusing on deficit reduction, now that their member companies are healthy again and making record profits after receiving trillions in government subsidies. The Roundtable played a pivotal role in the appointment of Hank Paulson, formerly the CEO of Roundtable member Goldman Sachs, who replaced Roundtable member John Snow as US Treasury Secretary. The Roundtable also strongly lobbied on behalf of current Treasury Secretary Tim Geithner and White House National Economic Council Director Larry Summers. Although there has been recent talk of Geithner being replaced at the Treasury, the lead choice to replace him is Jamie Dimon, Roundtable member and CEO of JP Morgan Chase.

The drastic rise in military spending is also a result of Roundtable lobbyists pushing the interests of large military companies like Boeing and Bechtel, along with the largest oil companies like ExxonMobil, Shell, Hess and Chevron.

The Roundtable tells politicians what they want done, and the politicians do it. At times, Roundtable members even write the laws themselves. On financial reform alone, those representing Wall Street firms gave “$42 million to lawmakers, mostly to members of the House and Senate banking committees and House and Senate leaders.” During the 2008 election cycle, they gave $155 million: $88 million to Democrats and $67 million to Republicans. Keep in mind, this is the spending on just their financial reform initiative. When it came to health reform, they gave even more.

When it comes to getting elected, over 90% of the time the candidate who simply spends more money on their campaign wins the election. The Roundtable and politicians recognize this fact, so the overwhelming majority of current elected officials relied heavily on campaign funding from Roundtable members, including President Obama.

Shortly after Obama’s inauguration he held a meeting with Roundtable members at the St. Regis Hotel. The president of the Business Roundtable is John J. Castellani. Throughout the first nine months of Obama’s presidency, Castellani met with him at the White House more than any other person, with the exception of Chamber of Commerce CEO Tom Donohue. If you look at the records of people who have spent the most time with Obama in the White House, other than these two, another frequent visitor is Edward Yingling, the president of the American Bankers Association.

These organizations - the Business Roundtable, Chamber of Commerce and the American Bankers Association - along with the Federal Reserve, a secretive quasi-government private institution, form the center of the Economic Elite’s power structure. Since the bailout, the Federal Reserve has been working closely with private firm BlackRock. Due to this relationship, BlackRock has emerged as the world’s largest money manager and now manages more assets than the Federal Reserve. They also “manage many of the Treasury Department’s big investments.”

On a global level, you have economic institutions like the World Trade Organization (WTO), the International Monetary Fund (IMF) and the World Bank, and international treaties like NAFTA. These organizations already form a de facto world government that has rights beyond our constitutional rights and national sovereignty. If the WTO makes a ruling that goes against US law, the WTO ruling supersedes US law and wins out.

Here is how Global Exchange explains these global institutions:

“The World Trade Organization is the most powerful legislative and judicial body in the world. By promoting the ‘free trade’ agenda of multinational corporations above the interests of local communities, working families, and the environment, the WTO has systematically undermined democracy around the world…. Unlike United Nations treaties, the International Labor Organization conventions, or multilateral environmental agreements, WTO rules can be enforced through sanctions. This gives the WTO more power than any other international body. The WTO’s authority even eclipses national governments.

World Bank and International Monetary Fund (IMF)

When the Bank and the Fund lend money to debtor countries, the money comes with strings attached. These strings come in the form of policy prescriptions called ’structural adjustment policies.’ These policies—or SAPs, as they are sometimes called—require debtor governments to open their economies to penetration by foreign corporations, allowing access to the country’s workers and environment at bargain basement prices. Structural adjustment policies mean across-the-board privatization of public utilities and publicly owned industries. They mean the slashing of government budgets, leading to cutbacks in spending on health care and education…. And, as their imposition in country after country in Latin America, Africa, and Asia has shown, they lead to deeper inequality and environmental destruction.”

In addition to dominating our political and economic system, the Economic Elite have already created their own private military. Their private military is now more powerful than the US military. As mentioned earlier, private mercenaries now outnumber US soldiers and receive the lion’s share of military spending.

Corporations like SAIC, Blackwater, Bechtel, Raytheon and Halliburton are composed of the most elite worldwide intelligence and military officers. These are the highly profitable and powerful entities that the Economic Elite turn to when national militaries and intelligence agencies - like the CIA, FBI or other government run entities - can’t get the job done.

For instance, SAIC, a “stealth company” that most people have never heard of, is considered to be the brains of the entire US intelligence apparatus, more powerful than the much more popularly known CIA, NSA and FBI - all agencies that SAIC is deeply intertwined with. I urge you to research SAIC to get a crash course in how the true power structure functions. You can start by reading an excellent investigative report by Donald L. Barlett and James B. Steele titled, “Washington’s $8 billion shadow.”

The Economic Elite dominate US intelligence and military operations. Other than the obvious geo-strategic reasons, the never-ending and ever-expanding War on Terror’s objective is to drain the US population of more resources and further rob US taxpayers, while using our tax money to create a private military that is more powerful than the US military.

I think any logical person can see the ominous implications of having such a vast and powerful private military and intelligence complex, created for and used, in secrecy, by the Economic Elite. Outside of the blatant economic policy attacks, heavily armed and sophisticated covert powers led by small groups of Economic Elite are now a serious risk and present danger.

In conclusion, these economic and government policy forming organizations, along with their private military and intelligence corporations, form the core of the Economic Elite power structure.

“I think one has to say it’s not just simply a matter of capturing people and holding them accountable, but removing the sanctuaries, removing the support systems. Paul Wolfowitz



Radical Difference Between Monetization 1 and QE2

Overview

It's official: the Federal Reserve announced on November 3rd that it will create approximately $600 billion of new money to fund US Treasury bond purchases, and will also utilize another $250-$300 billion of money that had been previously created (also out of the nothingness). The usual term in the media for these planned purchases is "QE2", as in the second round of quantitative easing.

The "2" in "QE2" implies that this is something that has been done before.

This implication is dead wrong.

"QE2" is radically different – and radically more dangerous – than the risky games that were played with earlier "quantitative easings". The Fed's current actions are all too likely to go down into financial infamy, and this brief article is intended to warn readers about some of the key differences this time around.

The most significant difference is that this time there appears to be no references to "sterilization" of the newly created money. It's likely good old-fashioned monetization in other words, with potentially quick and dire results.

It is also essential to note that the Fed won't be directly buying Treasury bonds from the US Treasury, but will instead be intervening in the Treasury bond markets. In other words, the Fed will be creating an artificial Treasury bond market, where it uses an unlimited amount of newly created public money to buy from private investment banks.

No Apparent "Sterilization"

As I wrote about extensively earlier this year, the previous "quantitative easing" (which means exactly the same thing as directly creating vast sums of money out of thin air, but sounds more responsible) has been done by the Federal Reserve and European Central Bank in a manner which economists refer to as "sterilized". This concept is confusing to most people, and I do my best to explain the process in understandable terms in the three articles linked below.

The Federal Reserve directly creates money in whatever volume it feels like - no need for borrowing despite the common myth - through creating "excess reserve balances" and using that new money to pay banks for securities purchases, as explained in "Creating A Trillion From Thin Air."

http://danielamerman.com/articles/Trillions.htm

However, while a (desperate) central bank wants to be able to spend money without limits, letting that new money escape into the general money supply can lead to major inflation in a hurry. So with the previous rounds, the Fed and ECB each used their "sterilization" powers to essentially put a corral up around the new money, and keep it from escaping out into the economy, as described in my article "Containing Inflation Via Unlimited Monetary Creation".

http://danielamerman.com/articles/Containment.htm

This "magic" process of "painlessly" creating trillions of dollars to bail politically connected banks out of their mistakes is far from free, and besides the enormous risks to the general population and to the value of their savings, has the nasty side effect of effectively "hollowing out" the real economic basis underlying the banking system. This is because the banks can't really spend their "sterilized" money, but must have an ever larger share of their balance sheet assets consist of those economically meaningless excess reserve balances, as described in my article "The Fed's Hollowing Out Of US Banks".

http://danielamerman.com/articles/Hollow.htm

Now, when central banks create vast new sums of "sterilized" money, they are usually very, very careful to emphasize that the new money can't escape into general circulation. They do this to reassure the markets and their trading partners that their currency isn't (they hope) about to implode in value in an inflationary meltdown.

I've carefully studied the Federal Reserve statement of November 3 that described the Treasury bond purchase program. I studied Bernanke's detailed October 15 speech about the upcoming "nonconventional" steps which the Fed would be taking. I read Bernanke's simplistic public explanation of the actions in yesterday's Washington Post. There were a number of phrases that could be interpreted in different ways – but there was no direct reference to the sterilization of these funds. There were no promises that the funds would be kept out of the money supply. I'm profoundly skeptical that this lack of direct mention was some sort of omission.

Instead, it is a powerful offensive weapon in a currency war.

Keep in mind, that this has always been a monetization designed to meet multiple purposes. As covered in my article of two weeks ago, "Falling Dollar Means Rising Consumer Price Inflation", in an effort to revive the failing US economy, the US is attempting to slash the value of the dollar compared to other world currencies. If this can be done without setting off a wide scale currency war, then US jobs are helped in two ways, as the weaker dollar means that US exported goods become relatively cheaper and thus win more business overseas, even as the weaker dollar removes the artificial advantage that China and other nations have had in exporting their goods into the US.

As Chinese and other imported goods rise in price, they would lose market share, with the sales going to US based companies. The eventual goal would be for US workers producing US goods to fill the shelves of Wal-Mart rather than China doing so (which also necessarily means these goods cost more than they do today).

The threat that has successfully driven down the value of the US dollar since September is now being used in practice. Despite the doublespeak official announcements that you may read in the papers, this is a communication between central banks, and everyone involved knows what's going on. The US is threatening inflation that will drive down the value of its currency, making other nations unwilling to hold dollars, and the lack of demand drops the value of the dollar relative to those nations' currencies, with benefits passing through to US companies that then hopefully revive the US economy - albeit at a terrible cost to US savers, and older Americans in general.

Spending Real Money

In evaluating why this so-called "QE2" is so different from the first rounds of quantitative easing, we need to understand that the use of the funds is quite different. In the autumn of 2008 the Federal Reserve used the original round of money to create artificial liabilities when there were no lenders, thereby keeping the highly leveraged banking system from collapsing. The money wasn't actually being spent on anything you could reach out and touch; this was more about balance sheets and accounting manipulations on a massive scale.

During 2009 and early 2010, for the true second round of quantitative easing (which involved rolling the new dollars over from the first round of bank loans and creating substantially more new dollars), the Federal Reserve created an artificial mortgage market, so that mortgage interest rates would be lower than what a free market would've allowed, and thereby would hopefully help slow down or avert a collapse in the housing market. The new money was used to acquire financial instruments (mortgage securities), but "sterilization" meant that the newly created money would not be allowed to escape from the Federal Reserve's and banks' balance sheets. So again, the new money wasn't being used to buy or create anything you could actually reach out and touch. The mortgage money had already been lent by the bank, so the newly created Fed money didn't go to the home purchasers.

What makes this current round night-and-day different is that the new money is being created to pay real people for real jobs and real tangible goods. The United States government budget deficit is not about market values of financial instruments, but rather about paying workers on a massive scale for "stimulus" projects. It's about massive road reconstruction projects and expensive high-speed rail lines – with the money being given to workers to go out and spend, in return for their labor. It's about paying a vast army of federal workers - who spend their paychecks. The federal budget deficit is about massive transfers and redistributions of wealth within the US, including Social Security and Medicare, low income housing and many other purposes. All of which require real money that really gets spent by real people.

This is about "stimulating" the economy, not sterilizing the hidden bailout funds. "Stimulating" means the money reaches the economy.

In other words, this money goes directly into the general money supply at a rate of about $110 billion per month through at least June, (the money is the sum of the to-be-created $600 billion, and the cash flow from the Fed's mortgage security portfolio that was purchased with created money). This adds up to lots more newly created government dollars chasing the same goods and services, and competing with savings earned over a lifetime.

There are about 111 million US households, so $110 billion per month in government spending funded by direct monetary creation is equal to about $1,000 a month per household in new money that is competing with our salaries and savings. And add another $1,000 in government money the next month. And so forth.

Another way of looking at this is that with an annual economy of a little over $14 trillion, total private and government spending runs about $1.2 trillion per month. Creating $110 billion a month in new money for the government to spend, means that about 9% of the economy will be purchased by newly created dollars. So 9% of purchases in this new economy would be made by brand new dollars, competing with and just as good as yours and mine, being spent for whatever purposes the government desires.

Some commentators are already noting that the Fed's plan would buy about the same amount of US Treasury bonds as net new Federal borrowing, meaning the entire US government budget deficit is being covered by the Federal Reserve's manufacturing new money, month by month. That is an interesting coincidence, isn't it? However, there is a much more fundamental "coincidence" at play here. The graph below is from my article "Soaring Government Spending 'Crowds Out' Private Investment Returns":

http://danielamerman.com/articles/Crowding.htm

Understand the graphs above and below, and you will see the heart of what is happening. Even using (suspect) official government statistics, the damage to the private sector has been catastrophic. The private sector shrank by $1.3 trillion between 2007 and 2009. But the economy "only" shrank by $300 billion. The difference was "covered" by an explosive growth in government spending, with federal, state and local government spending rising by $1 trillion per year - at a time when tax revenues were falling.

This is no mere recession, and it is only massive government growth that has kept the plausible deniability in place. In two years, the government's share of the economy grew by 8%, from 35% to 43%. Without this fundamental change in the economy - which destroys the very basis of conventional stock market investing, as explained in the linked article - the US economy is in a collapse scenario.

What the Federal Reserve is doing is directly creating money equal to 9% of the economy, to artificially increase the government's share of the economy by 9%. It is artificial money for an artificial economy to avert collapse. With again, the night and day difference between this monetization and previous "quantitative easing" being that this new money is going directly into the economy, and competing with your money and your savings.

The only way out, as the government may be belatedly realizing, is to grow the real US economy. But you can't grow the real economy when the dollar is too high, because of currency manipulations by other countries. US goods become too expensive to export, even as domestic US industries are destroyed by subsidized foreign competition.

To grow the real economy - the value of the dollar must be slashed. Which, very conveniently, can be done through open monetization. So, you create vast sums of money out of thin air to artificially fund the economy, hoping to string things out as long as possible. Simultaneously, this very public monetization slashes the value of your currency, thereby stimulating real economic growth, which if you get really, really lucky, might grow the real economy fast enough to recover to a healthy level, and allow you to find an exit strategy from the insanely dangerous monetization policy before the value of the currency is annihilated.

That's the theory, anyway.

Not Direct Purchases, But Open Manipulation

There is something else essential for investors and savers to understand about the process which the Federal Reserve has just outlined. The Federal Reserve is not directly purchasing treasury bonds from the US government. Instead, US banks are purchasing the bonds from the US Treasury to fund the deficit, and then selling an equal amount of other bonds (likely at a nice profit) to the Federal Reserve. It would be reasonable to get annoyed at what appears to be the Fed's paying banks additional money to do effectively nothing, but to do so would be to miss the real point of this arrangement and the real danger.

To understand, let's explore what would happen if the Federal Reserve directly bought bonds from the Treasury (with appropriate legal changes if needed), but did not intervene in the Treasury bond markets. If there were a free bond market that was controlled by the self-interested investment decisions of private US investors (the foreign central banks and investors having fled because of Federal Reserve actions), then these investors might look at the Fed directly monetizing and say "I don't think I am being adequately compensated for my risk." And next thing you know, Treasury bonds might be going for 10% yields, or 15%+ yields. With ripple effects almost instantly going out into all interest rates throughout the US economy.

That's not what's going to happen (or apparently not yet, anyway).

Instead, the Federal Reserve, with effectively unlimited money at its disposal (targets can always be changed), can intervene at any time it wishes, in whatever volume it wishes, to make sure that Treasury bond and bill prices and yields are exactly what the Fed wants them to be. The US Treasury bond market then becomes an artificial market, much like the US mortgage market, with no connection to objective reality, and no discipline when it comes to the relationship between irresponsible government behavior and interest rates.

The private investors in the market play along, and maybe even increase their investments, because they understand that their "counterparty" can create money at will, and therefore (from a short term and terribly flawed perspective) it may look like risk-free profits. So long as they play along with the Fed.

If bond traders go the other direction, and speculate against the Fed - the Fed crushes them with its control of the market. In an openly and massively manipulated market, the governing factor is not theoretical fundamentals, but playing ball with the manipulator, and cooperating for your share of the rigged "profits".

What this means – for so long as this farce can hold together – is that there are no checks and balances on government spending, or on the share of the US economy that is controlled by the US government.

Even over the medium term this is a disaster scenario. But over the short term, it holds the game together for an increasingly desperate Federal Reserve and US government. Treasury yields ripple throughout all borrowings, and it is this absolute control of treasury yields that allows the Federal Reserve to keep interest rates low regardless of real inflation levels, even as stimulus funds continue to flow in unlimited volume, and regardless of what is happening with real wealth in the real US economy.

If you are a native-born US citizen – there's nothing "2" about this.


We've never seen anything like this in our lifetimes.

Similar things have happened in the world enough times before, however, even if the words "quantitative easing" were never used.

What If The New Cash Is Sterilized?

The Fed has been deliberately vague about how exactly it will handle this program, which leaves open the possibility that the Fed could "sterilize" the new cash, or partially sterilize, or sterilize future purchases for future months.

The problem with this approach is that it effectively leads to the rapid systemic destruction of the economic basis of the US banking system, and also worsens the situation in the private sector of the economy. As covered in my "Hollowing Out" article linked above, by the end of the Federal Reserve's mortgage security purchase program (the previous "quantitative easing"), about 10% of the approximately $12 trillion in US banking system assets consisted of sterilized money held at the Federal Reserve. The Federal Reserve is committed as a matter of policy to keeping this money from escaping into general circulation – effectively preventing the bank from actually lending it out to a company for instance.

New monetary creation at a rate of approximately $110 billion per month is equal to a monthly volume of about 1% of total banking assets. The announced program, if "sterilized", would mean that by June, about 16% of total US bank assets would consist of "sterilized money", i.e. balances at the Federal Reserve that can't be used anywhere else.

Another way of phrasing this is that the US government budget deficit would be funded by essentially "taking" 1% of the assets of the US banking system every month, and using that to cover the excess US government spending. How this works is that in the first month, the primary dealer banks would purchase $110 billion in newly issued Treasury bonds, and would sell $110 billion in already existing Treasury bonds to the Federal Reserve. The Fed would pay for the bonds with money newly created on the spot – but because the money has been "sterilized", the $110 billion in sale proceeds isn't really spendable by the selling bank. The actual Treasury bonds bought and sold are different. It would be pure coincidence if the sector of the bond market whose prices and yields the Fed was most interested in manipulating that month were to match what the Treasury department was selling (and there is no need for dates or dollar amounts to precisely match up).

The following month, when the primary dealers purchase another $110 billion of newly issued Treasury securities to fund the Federal budget deficit, they don't have access to the $110 billion from the previous month (*), so they have to take a new $110 billion out of their other assets to purchase the new bonds. They also make the sale of $110 billion of whatever already outstanding Treasury bonds the Fed is most interested in manipulating the price of that month, and the Fed pays them a nice price, but they have to leave the second $110 billion in sale proceeds at the Fed too (it's not technically mandatory, but Bernanke is proud of the tools he uses to sterilize the cash, as covered in my "Containing Inflation Via Unlimited Money Creation" article). (*) If they did use the previous month's Fed payment to buy new Treasury bonds, then it is a direct monetization scenario, not a sterilization scenario.

So now the banking system is out $220 billion in terms of accessible cash, and when the third month's $110 billion of Treasury bonds needs to be bought, that can't come from the newly created Fed money either. Which means another $110 billion has to come out of other assets of the US banking system.

This rapid hollowing out of the US banking system to fund a voracious and apparently never-ending federal deficit, where every month a greater share of banking assets becomes the debt of a bankrupt government, is obviously a dangerous strategy that grows more likely to blow up each month it is employed. It also means that with each month, there are less banking assets available to be lent to businesses and consumers, which then makes economic recovery that much less likely. In other words it would be an insane strategy for a government that is desperately trying to revive the private sector economy, which is one of the reasons I find further sterilization to be unlikely.

With the much more likely monetization scenario, the Fed purchases from the primary dealers $110 billion in whatever Treasury bonds it is most interested in manipulating the price of, in order to control interest rates. The primary dealer banks take the $110 billion, which is non-restricted (as it isn't sterilized) and buy $110 billion of that month's new Treasury bond issuance. Because the bank cash flow between buying and selling is a wash (except for their profits on each side), from a cash flow perspective this is the same as the Federal Reserve directly creating money to buy all newly issued Treasury bonds. However, the advantage to doing it this way, as previously discussed, is that the Fed not only directly funds the deficit, but it takes direct control of the Treasury market, which more or less translates to direct control over most US interest rates.

As for what the Fed is doing – Bernanke is effectively mumbling when it comes to the explanations. He's being careful not to be clear, so he can claim to have his cake and eat it too (maintaining even a semblance of plausible deniability is also very important in the diplomatic maneuverings accompanying the nascent currency war). As explained above, when the central bank creates vast sums of new money – and doesn't explicitly say it is "sterilizing" – the odds are quite high that in fact, it is not sterilizing. But even if it is sterilizing, the results of this unprecedented monetary creation still lead to another disaster scenario. Further sterilization accelerates the collapse of the private sector and banking system in real terms, which must then be covered by still more monetization.

It has to be one or the other: either newly created money is going directly into the economy in straight up monetization, or the assets of the US banking system are being sucked out by the voracious Federal Government deficit at a very fast rate, leaving a hollow shell. What the Fed is doing to the banks with sterilization is much like a spider consuming an insect: punching a hole in the exoskeleton with its fangs and sucking the innards out, while the exoskeleton remains an intact but hollow shell. (For those who would say the Fed would never do that to the banks that run it - the Fed has already been doing it, and don't forget the crucial distinction between the interests of the banks and the personal financial interests of the senior executives who run the banks.)

Either about $1,000 a month per US household is being created and spent in the economy in direct monetization, competing with your dollars and savings - or about $1,000 a month per US household will be sucked out of the banking system by the government through sterilization, meaning less money for business and consumer lending, and an acceleration in the decline of the real economy. The former in my opinion is the much more likely route, and represents a radical change, but either way, there is no such thing as "free money", and the piper will be paid. By all of us.

Finding Refuge

We have a good idea of the path ahead - which is the destruction of the value of the currency, as well as the impoverishment of a good part of the population. By far, the heaviest punishment will fall on the older members of the population whose savings are destroyed, and who do not have the remaining years to recapture what they have lost.

There are solutions, however, and not everyone will see their savings destroyed. By taking the right series of steps, assets can be preserved – or even expanded, even in after-inflation and after-tax terms. The difference between being destroyed, and saving your assets, quite simply comes down to a matter of making informed decisions. It is a matter of education, in other words.

A good starting step is to read and understand the three articles linked earlier in this article which cover the essentials of direct monetary creation, sterilization, and hollowing out the banking system. I've done my very best to make these articles understandable, and from the feedback which I received at the time they were published, these articles provide valuable new insights into what is really happening and what the central banks have really been doing.

When it comes time for action, the simple and increasingly popular solution is to pull all you can out of paper investments and symbolic currencies, put them in gold, and hunker down to survive the storm that is building in strength by the week.


Unfortunately, however, we live in a complex and deeply unfair world, that makes mincemeat of emotional reactions and simple solutions. As illustrated in step-by-step, easy to understand – but irrefutable – detail in the article "Hidden Gold Taxes: The Secret Weapon Of Bankrupt Governments" (linked below), a simple solution of just buying gold leaves you handing a good chunk, or perhaps most of your starting net worth, over to the government by the time all is said and done. The way the government – under existing laws – effectively confiscates the wealth of gold investors in a highly inflationary environment is little understood by most gold investors, but should form the central point for their investment strategies.

http://danielamerman.com/articles/GoldTaxes1.htm

Let me suggest an alternative approach, which is to study, learn and reposition. To have a chance, you must learn not just how wealth will redistribute, but how unfair government tax policies (that can be relied upon to increase in unfairness) will cripple most simple methods of attempting to survive inflation.

Then, yes – buying gold (and perhaps a lot of it) can be one key component of a portfolio approach, as discussed in my Gold Out-Of-The-Box DVD set. Use multiple components, each doing what they do best, shift the components in a dynamic strategy over time, and position yourself so that wealth will be redistributed to you in a manner that reverses the effects of government tax policy. So that instead of paying real taxes on illusionary income, you're paying illusory taxes on real income. And the higher the rate of inflation and the more outrageous the government actions – the more your after-inflation and after-tax net worth grows.

Best wishes to you in these perilous times.

Do you know how to Turn Inflation Into Wealth? To position yourself so that inflation will redistribute real wealth to you, and the higher the rate of inflation – the more your after-inflation net worth grows? Do you know how to achieve these gains on a long-term and tax-advantaged basis? Do you know how to potentially triple your after-tax and after-inflation returns through Reversing The Inflation Tax? So that instead of paying real taxes on illusionary income, you are paying illusionary taxes on real increases in net worth? These are among the many topics covered in the free “Turning Inflation Into Wealth” Mini-Course. Starting simple, this course delivers a series of 10-15 minute readings, with each reading building on the knowledge and information contained in previous readings. More information on the course is available at DanielAmerman.com or InflationIntoWealth.com  



Daniel R. Amerman, CFA





Many nations have been here before – and watched the value of their currencies collapse. The creation of "free" money that is so attractive to politicians for a brief period of time, becomes the most expensive possible way of funding government expenditures. Particularly for the savers, and especially the older savers, who see their life savings wiped out as a result of these grossly irresponsible actions.

Fed’s “QE 2″ Actions Will Likely Go Down As Financial Infamy

“QE 2″ is radically different – and radically more dangerous – than the risky games that were played with earlier “quantitative easings”. This brief article is intended to warn readers about some of the key differences this time around.

So says Daniel R. Amerman, CFA (danielamerman.com) in an article* which Lorimer Wilson, editor of http://www.munknee.com/ has reformatted into edited [...] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Amerman goes on to say:

The Federal Reserve has announced that it will create approximately $600 billion of new money to fund US Treasury bond purchases which the media is referring to as “QE 2″, as in the second round of quantitative easing. The “2″ in “QE 2″ implies that this is something that has been done before. This implication is dead wrong because this time there appears to be no references to “sterilization” of the newly created money. It’s likely good old-fashioned monetization in other words, with potentially quick and dire results.

It is also essential to note that the Fed won’t be directly buying Treasury bonds from the US Treasury as a result of the most recent “QE 2″ but will, instead, be intervening in the Treasury bond markets. In other words, the Fed will be creating an artificial Treasury bond market, where it uses an unlimited amount of newly created public money to buy from private investment banks.

No Apparent “Sterilization” in Most Recent “QE 2″

The previous “QE” (which means exactly the same thing as directly creating vast sums of money out of thin air, but sounds more responsible) has been done by the Federal Reserve and European Central Bank in a manner which economists refer to as “sterilized”. This concept is confusing to most people, and I do my best to explain the process in understandable terms in the three articles linked below.

The Federal Reserve directly creates QE money in whatever volume it feels like – no need for borrowing despite the common myth – through creating “excess reserve balances” and using that new QE money to pay banks for securities purchases, as explained in “Creating A Trillion From Thin Air.” (Creating A Trillion From Thin Air Daniel R. Amerman)

However, while a (desperate) central bank wants to be able to spend QE money without limits, letting that new QE money escape into the general money supply can lead to major inflation in a hurry. So with the previous rounds, the Fed and ECB each used their “sterilization” powers to essentially put a corral up around the new QE money to keep it from escaping out into the economy, as described in “Containing Inflation Via Unlimited Monetary Creation.” (Containing Inflation Via Unlimited Money Creation Daniel R. Amerman)

The “magic” process of “painlessly” creating trillions of dollars to bail politically connected banks out of their mistakes is far from free, and besides the enormous risks to the general population and to the value of their savings, such QE has the nasty side effect of effectively “hollowing out” the real economic basis underlying the banking system. This is because the banks can’t really spend their “sterilized” money, but must have an ever larger share of their balance sheet assets consist of those economically meaningless excess reserve balances, as described in “The Fed’s Hollowing Out Of U.S. Banks”. (The Fed's Hollowing Out Of US Banks Daniel R. Amerman)

Now, when central banks create vast new sums of “sterilized” money, they are usually very, very careful to emphasize that the new QE money can’t escape into general circulation. They do this to reassure the markets and their trading partners that their currency isn’t (they hope) about to implode in value in an inflationary meltdown.

I have carefully studied the Federal Reserve statement of November 3 that described the Treasury bond QE purchase program and Bernanke’s detailed October 15 speech about the upcoming “nonconventional” QE steps which the Fed would be taking… [and while] there were a number of phrases that could be interpreted in different ways there was no direct reference to the sterilization of these QE funds. There were no promises that the QE funds would be kept out of the money supply[and, as such,] I am profoundly skeptical that this lack of direct mention was some sort of omission. Instead, [I believe this latest QE has been introduced as] a powerful offensive weapon in a currency war.

Keep in mind, that this QE has always been a monetization designed to meet multiple purposes. The U.S. is attempting to slash the value of the dollar compared to other world currencies in an effort to revive the failing U.S. economy. If this can be done without setting off a wide scale currency war, then U.S. jobs are helped in two ways, as 1) the weaker dollar means that U.S. exported goods become relatively cheaper and thus win more business overseas, even as 2) the weaker dollar removes the artificial advantage that China and other nations have had in exporting their goods into the U.S.. As Chinese and other imported goods rise in price, they would lose market share, with the sales going to U.S. based companies. The eventual goal would be for U.S. workers producing U.S. goods to fill the shelves of Wal-Mart rather than China doing so (which also necessarily means these goods cost more than they do today as discussed at length in my recent article, ”Falling Dollar Means Rising Consumer Price Inflation”).

The threat that has successfully driven down the value of the U.S. dollar since September is now being used in practice. Despite the doublespeak official announcements that you may read in the papers, this is a communication between central banks, and everyone involved knows what’s going on. The U.S. is threatening inflation that will drive down the value of its currency, making other nations unwilling to hold dollars, and the lack of demand drops the value of the dollar relative to those nations’ currencies, with benefits passing through to U.S. companies that then hopefully revive the U.S. economy – albeit at a terrible cost to U.S. savers, and older Americans in general.

The New “QE 2″ Is Spending Real Money

In evaluating why this so-called “QE 2″ is so different from the first rounds of QE, we need to understand that the use of the funds is quite different. In the autumn of 2008 the Federal Reserve used the original round of QE to create artificial liabilities when there were no lenders, thereby keeping the highly leveraged banking system from collapsing. The QE money wasn’t actually being spent on anything you could reach out and touch; this was more about balance sheets and accounting manipulations on a massive scale.

During 2009 and early 2010, for the true second round of QE (which involved rolling the new dollars over from the first round of bank loans and creating substantially more new dollars), the Federal Reserve created an artificial mortgage market, so that mortgage interest rates would be lower than what a free market would have allowed, and thereby would hopefully help slow down or avert a collapse in the housing market. The new QE money was used to acquire financial instruments (mortgage securities), but “sterilization” meant that the newly createdQE money would not be allowed to escape from the Federal Reserve’s and banks’ balance sheets. So again, the new QE money wasn’t being used to buy or create anything you could actually reach out and touch. The mortgage money had already been lent by the bank, so the newly created Fed QE money didn’t go to the home purchasers.

What makes this current round night-and-day different is that the new QE money is being created to pay real people for real jobs and real tangible goods. The United States government budget deficit is not about market values of financial instruments, but rather about paying workers on a massive scale for “stimulus” projects. It’s about massive road reconstruction projects and expensive high-speed rail lines – with the QE money being given to workers to go out and spend, in return for their labor. It’s about paying a vast army of federal workers – who spend their paychecks. The federal budget deficit is about massive transfers and redistributions of wealth within the U.S., including Social Security and Medicare, low income housing and many other purposes – all of which require real money that really gets spent by real people. This is about “stimulating” the economy, not sterilizing the hidden bailout funds. “Stimulating” means the QE money reaches the economy.

In other words, this QE money goes directly into the general money supply at a rate of about $110 billion per month through at least June, (the money is the sum of the to-be-created QE $600 billion, and the cash flow from the Fed’s mortgage security portfolio that was purchased with created QE money). This adds up to lots more newly created QE government dollars chasing the same goods and services, and competing with savings earned over a lifetime.

There are about 111 million U.S. households, so $110 billion per month in government QE spending funded by direct monetary creation is equal to about $1,000 a month per household in new QE money that is competing with our salaries and savings – and another $1,000 in governmentQE money the next month – and so forth.

Another way of looking at this is that with an annual economy of a little over $14 trillion, total private and government spending runs about $1.2 trillion per month. Creating $110 billion a month in new QE money for the government to spend, means that about 9% of the economy will be purchased by newly created dollars. So 9% of purchases in this new economy would be made by brand new QE dollars, competing with and just as good as yours and mine, being spent for whatever purposes the government desires.

Some commentators are already noting that the Fed’s QE plan would buy about the same amount of US Treasury bonds as net new Federal borrowing, meaning the entire U.S. government budget deficit is being covered by the Federal Reserve’s manufacturing new QE money, month by month. That is an interesting coincidence, isn’t it? However, there is a much more fundamental “coincidence” at play here. See my article “Soaring Government Spending ‘Crowds Out’ Private Investment Returns” for some very revealing graphs on the subject (Soaring Government Spending Crowds Out Private Investment Returns Daniel R. Amerman)

What the Federal Reserve is doing is directly creating QE money equal to 9% of the economy to artificially increase the government’s share of the economy by 9%. It is artificial money for an artificial economy to avert collapse. With again, the night and day difference between this monetization and previous “quantitative easing” being that this new QE money is going directly into the economy, and competing with your money and your savings.

The only way out, as the government may be belatedly realizing, is to grow the real U.S. economy but you can’t grow the real economy when the dollar is too high, because of currency manipulations by other countries causing U.S. goods to become too expensive to export, even as domestic U.S. industries are destroyed by subsidized foreign competition.

To grow the real economy the value of the dollar must be slashed which, very conveniently, can be done through open QE monetization. So, you create vast sums of QE money out of thin air to artificially fund the economy, hoping to string things out as long as possible. Simultaneously, this very public QE monetization slashes the value of your currency, thereby stimulating real economic growth, which if you get really, really lucky, might grow the real economy fast enough to recover to a healthy level, and allow you to find an exit strategy from the insanely dangerous monetization policy before the value of the currency is annihilated. That’s the theory, anyway.

“QE 2″ Is Not Undertaking Direct Purchases – Just Undertaking Open Manipulation

There is something else essential for investors and savers to understand about the QE 2 process which the Federal Reserve has just outlined. The Federal Reserve is not directly purchasing treasury bonds from the US government.

Instead, U.S. banks are purchasing the bonds from the US Treasury to fund the deficit, and then selling an equal amount of other bonds (likely at a nice profit) to the Federal Reserve. It would be reasonable to get annoyed at what appears to be the Fed’s paying banks additional money to do effectively nothing, but to do so would be to miss the real point of this arrangement and the real danger.

To understand, let’s explore what would happen if the Federal Reserve directly bought bonds from the Treasury (with appropriate legal changes if needed), but did not intervene in the Treasury bond markets. If there were a free bond market that was controlled by the self-interested investment decisions of private U.S. investors (the foreign central banks and investors having fled because of Federal Reserve actions), then these investors might look at the Fed directly monetizing and say “I don’t think I am being adequately compensated for my risk.” The next thing you know, Treasury bonds might be going for 10% yields, or 15%+ yields. With ripple effects almost instantly going out into all interest rates throughout the U.S. economy [and] that’s not what’s going to happen (or apparently not yet, anyway).

Instead, the Federal Reserve, with effectively unlimited QE money at its disposal (targets can always be changed), can intervene [with additional QE] at any time it wishes, in whatever volume it wishes, to make sure that Treasury bond and bill prices and yields are exactly what the Fed wants them to be. The U.S. Treasury bond market then becomes an artificial market, much like the U.S. mortgage market, with no connection to objective reality, and no discipline when it comes to the relationship between irresponsible government behavior and interest rates. The private investors in the market play along, and maybe even increase their investments, because they understand that their “counterparty” can create money at will, and therefore (from a short term and terribly flawed perspective) it may look like risk-free profits. So long as they play along with the Fed.

If bond traders go the other direction, and speculate against the Fed – the Fed crushes them with its control of the market. In an openly and massively manipulated market, the governing factor is not theoretical fundamentals, but playing ball with the manipulator, and cooperating for your share of the rigged “profits”. What this means – for so long as this farce can hold together – is that there are no checks and balances on government spending, or on the share of the U.S. economy that is controlled by the U.S. government.

While this is a disaster scenario over the medium term over the short term it holds the game together for an increasingly desperate Federal Reserve and U.S. government. Treasury yields ripple throughout all borrowings, and it is this absolute control of treasury yields that allows the Federal Reserve to keep interest rates low regardless of real inflation levels, even as stimulus funds continue to flow in unlimited volume, and regardless of what is happening with real wealth in the real U.S. economy.

If you are a native-born US citizen – there’s nothing “2″ about this. We’ve never seen anything like this in our lifetimes [although] manyother nations have been here before – and watched the value of their currencies collapse. The creation of “free” QE money that is so attractive to politicians for a brief period of time, becomes the most expensive possible way of funding government expenditures. Particularly for the savers, and especially the older savers, who see their life savings wiped out as a result of these grossly irresponsible actions.

What If The New “QE 2″ Cash Is Sterilized?

The Fed has been deliberately vague about how exactly it will handle this latest QE program, which leaves open the possibility that the Fed could “sterilize” the new cash, or partially sterilize, or sterilize future purchases for future months. The problem with this approach, [however,] is that it effectively leads to the rapid systemic destruction of the economic basis of the U.S. banking system, and also worsens the situation in the private sector of the economy. As covered in my “Hollowing Out” article linked above, by the end of the Federal Reserve’s mortgage security purchase program (the previous “QE”), about 10% of the approximately $12 trillion in U.S. banking system assets consisted of sterilized money held at the Federal Reserve. The Federal Reserve is committed as a matter of policy to keeping this QE 2 money from escaping into general circulation – effectively preventing the bank from actually lending it out to a company for instance.

New QE monetary creation at a rate of approximately $110 billion per month is equal to a monthly volume of about 1% of total banking assets. The announced QE program, if “sterilized”, would mean that by June, about 16% of total U.S. bank assets would consist of “sterilized money”, i.e. balances at the Federal Reserve that can’t be used anywhere else.

Another way of phrasing this is that the U.S. government budget deficit would be funded by essentially “taking” 1% of the assets of the U.S. banking system every month, and using that to cover the excess U.S. government spending. How this works is that in the first month, the primary dealer banks would purchase $110 billion in newly issued Treasury bonds, and would sell $110 billion in already existing Treasury bonds to the Federal Reserve. The Fed would pay for the bonds with money newly created on the spot – but because the money has been “sterilized”, the $110 billion in sale proceeds isn’t really spendable by the selling bank. The actual Treasury bonds bought and sold are different. It would be pure coincidence if the sector of the bond market whose prices and yields the Fed was most interested in manipulating that month were to match what the Treasury department was selling (and there is no need for dates or dollar amounts to precisely match up).

The following month, when the primary dealers purchase another $110 billion of newly issued Treasury securities to fund the Federal budget deficit, they don’t have access to the $110 billion from the previous month (**), so they have to take a new $110 billion out of their other assets to purchase the new bonds. They also make the sale of $110 billion of whatever already outstanding Treasury bonds the Fed is most interested in manipulating the price of that month, and the Fed pays them a nice price, but they have to leave the second $110 billion in sale proceeds at the Fed too (it’s not technically mandatory, but Bernanke is proud of the tools he uses to sterilize the cash, as covered in my “Containing Inflation Via Unlimited Money Creation” article). (**) If they did use the previous month’s Fed payment to buy new Treasury bonds, then it is a direct monetization scenario, not a sterilization scenario. So now the banking system is out $220 billion in terms of accessible cash, and when the third month’s $110 billion of Treasury bonds needs to be bought, that can’t come from the newly created Fed money either. Which means another $110 billion has to come out of other assets of the U.S. banking system.

This rapid hollowing out of the U.S. banking system to fund a voracious and apparently never-ending federal deficit, where every month a greater share of banking assets becomes the debt of a bankrupt government, is obviously a dangerous strategy that grows more likely to blow up each month it is employed. It also means that with each month, there are less banking assets available to be lent to businesses and consumers, which then makes economic recovery that much less likely. In other words it would be an insane strategy for a government that is desperately trying to revive the private sector economy, which is one of the reasons I find further sterilization to be unlikely.

With the much more likely monetization scenario, the Fed purchases from the primary dealers $110 billion in whatever Treasury bonds it is most interested in manipulating the price of, in order to control interest rates. The primary dealer banks take the $110 billion, which is non-restricted (as it isn’t sterilized) and buy $110 billion of that month’s new Treasury bond issuance. Because the bank cash flow between buying and selling is a wash (except for their profits on each side), from a cash flow perspective this is the same as the Federal Reserve directly creating money to buy all newly issued Treasury bonds. However, the advantage to doing it this way, as previously discussed, is that the Fed not only directly funds the deficit, but it takes direct control of the Treasury market, which more or less translates to direct control over most U.S. interest rates.

As for what the Fed is doing – Bernanke is effectively mumbling when it comes to the explanations. He’s being careful not to be clear, so he can claim to have his cake and eat it too (maintaining even a semblance of plausible deniability is also very important in the diplomatic maneuverings accompanying the nascent currency war). As explained above, when the central bank creates vast sums of new QE money – and doesn’t explicitly say it is “sterilizing” – the odds are quite high that in fact, it is not sterilizing. Even if it is sterilizing, though, the results of this unprecedented monetary creation still lead to another disaster scenario. Further sterilization accelerates the collapse of the private sector and banking system in real terms, which must then be covered by still more monetization.

It has to be one or the other: either newly created QE money is going directly into the economy in straight up monetization, or the assets of the U.S. banking system are being sucked out by the voracious Federal Government deficit at a very fast rate, leaving a hollow shell. What the Fed is doing to the banks with sterilization is much like a spider consuming an insect: punching a hole in the exoskeleton with its fangs and sucking the innards out, while the exoskeleton remains an intact but hollow shell. (For those who would say the Fed would never do that to the banks that run it – the Fed has already been doing it, and don’t forget the crucial distinction between the interests of the banks and the personal financial interests of the senior executives who run the banks.)

Either about $1,000 a month per U.S. household is being created and spent in the economy in direct monetization, competing with your dollars and savings – or about $1,000 a month per U.S. household will be sucked out of the banking system by the government through sterilization, meaning less money for business and consumer lending, and an acceleration in the decline of the real economy. The former in my opinion is the much more likely route, and represents a radical change, but either way, there is no such thing as “free money”, and the piper will be paid – by all of us.

Where to Find Refuge in a Post “QE 2″ World

We have a good idea of the path ahead – which is the destruction of the value of the U.S. dollar, as well as the impoverishment of a good part of the population. By far, the heaviest punishment will fall on the older members of the population whose savings are destroyed, and who do not have the remaining years to recapture what they have lost.

There are solutions, however, and not everyone will see their savings destroyed. By taking the right series of steps, assets can be preserved – or even expanded, even in after-inflation and after-tax terms. The difference between being destroyed, and saving your assets, quite simply comes down to a matter of making informed decisions. It is a matter of education, in other words.

A good starting step is to read and understand the three articles linked earlier in this article which cover the essentials of direct monetary creation, sterilization, and hollowing out the banking system. I’ve done my very best to make these articles understandable, and from the feedback which I received at the time they were published, these articles provide valuable new insights into what is really happening and what the central banks have really been doing.

When it comes time for action, the simple and increasingly popular solution is to pull all you can out of paper investments and symbolic currencies, put them in gold, and hunker down to survive the storm that is building in strength by the week but such a simple solution of just buying gold leaves you handing a good chunk, or perhaps most of your starting net worth, over to the government by the time all is said and done. The way the government – under existing laws – effectively confiscates the wealth of gold investors in a highly inflationary environment is little understood by most gold investors, but should form the central point for their investment strategies as illustrated in step-by-step, easy to understand – but irrefutable – detail in the article “Hidden Gold Taxes: The Secret Weapon Of Bankrupt Governments” (Hidden Gold Taxes The Secret Weapon Of Bankrupt Governments Daniel R. Amerman).

Let me suggest an alternative approach, which is to study, learn and reposition. To have a chance, you must learn not just how wealth will redistribute, but how unfair government tax policies (that can be relied upon to increase in unfairness) will cripple most simple methods of attempting to survive inflation.

Buying gold (and perhaps a lot of it) can be one key component of a portfolio approach [but it is important to] use multiple components, each doing what they do best; to shift the components in a dynamic strategy over time; to position yourself so that wealth will be redistributed to you in a manner that reverses the effects of government tax policy so that instead of paying real taxes on illusionary income, you’re paying illusory taxes on real income and the higher the rate of inflation and the more outrageous the government actions – the more your after-inflation and after-tax net worth grows.

Radical Difference Between Monetization 1 and QE2 by Daniel R. Amerman

Why the Federal Reserve's Quantitative Easing Strategy Won't Save the U.S. Economy

With a second round of "quantitative easing" underway, the U.S. Federal Reserve wants us to believe that it is doing its duty as the nation's central bank – promoting maximum employment, keeping a lid on inflation and making sure that long-term interest rates remain at reasonable levels.


This is known as the Fed's "dual mandate," since the inflation and interest-rate objectives are really the same goal.

But here's a shocker: The Federal Reserve's real dual mandate is to enrich the banks the central bank is created by and works for – and to cover Congress when its laws enrich banks at the expense of jobless American taxpayers.

Understanding how quantitative easing works is simple. Understanding how banks and Congress are manipulating this economic tool is just a tad more complicated. Understanding how quantitative easing will impact your life – and your financial future – is just a matter of understanding the facts

Quantitative Easing Basics

The mechanics of quantitative easing are straightforward. For instance, the Federal Reserve can decide to lower interest rates for any number of reasons, but it's usually to encourage borrowing and consumption to stimulate the economy.

When the Fed decides to lower rates, it does so by reducing the so-called "Fed Funds" rate – the rate banks charge each other for overnight loans.

The Fed doesn't just say what it wants the Fed Funds rate to be. Through what's known as "open-market operations," the Fed actually lowers the rate to its target by purchasing U.S. Treasury securities from banks. The cash the banks receive in return can then be lent out.

And when a lot of banks have money to lend, there is usually a general decline in the overall level of interest rates in the broader marketplace.

Right now – because the Fed keeps purchasing short-term government securities – the Fed Funds rate is at roughly 0.00% to 0.25% (about one-quarter of 1.00%). This time around, however, low marketplace interest rates haven't been enough to stimulate the economy and generate reasonable growth. And those historically low rates have done nothing to bring down the high rate of unemployment.


So, to further stimulate the economy and encourage employment and prevent deflation (falling prices) the Fed is employing a second round of quantitative easing – a move the pundits refer to as "QE2," or even "QEII."

Regardless of what you call it, the maneuver simply means the central bank is buying still more government securities, focusing this time on those with longer-term maturities.

The Skinny on the Central Bank

The Fed doesn't actually "print" money to buy any of these securities. Only the U.S. Treasury Department can print money through the U.S. Bureau of Engraving and Printing that it controls (Indeed, the Bureau of Engraving's Web site address is most appropriate: http://www.moneyfactory.gov/).

The Fed pays for the securities it buys by electronically crediting the accounts of the primary dealers that sell the central bank U.S. Treasury bills, notes and bonds. The "credits" are passed along to the primary dealers' customers (other banks, securities broker-dealers, and financial institutions) who buy and sell their inventory to the Fed through the primary dealers.

So, while the Fed doesn't actually print money, it does create money – thanks to the credits that it pays out when it buys government or mortgage-backed securities.

The Federal Reserve is not a government entity. It is a private institution that functions at the courtesy of the U.S. government. It is essentially the banker to all other U.S. banks. It is beholden to Congress, which can amend the central bank's powers – or even strip them away. But it is permitted to operate with substantial independence.

U.S. government officials and the nation's most powerful banks created the institution under the Federal Reserve Act of 1913. Its creation – and even its early evolution – was fraught with intrigue and self-dealing. Today, however, it's viewed as necessary by most, and a necessary evil by some. But it is necessary.

The Deep Game Dealers Play

Thanks to its independence, the Fed, theoretically, controls monetary policy without the undue influence of politicians. While it might not be beholden to politicians in its role as a monetary policymaker, make no mistake: The central bank is beholden to the banks that make up its system – which are also the banks from whose ranks the Fed's positions of power and authority are filled.

Mechanically here's how the Fed is enriching its family of insiders. By keeping interest rates low for years – not to mention by aiding and abetting an unregulated derivatives market – the central bank helped foster the mortgage fiasco in the nation's prime and subprime mortgage markets.

Leveraged banks blew up and had to be rescued. The Fed did its part by opening its arms and offering unlimited funds to keep favored institutions liquid enough to survive.

Courtesy of the 0.00% Fed-Funds target rate, the central bank gave those banks what were essentially no-interest/low-interest loans to buy risk-free Treasury securities across different maturities. And now, through the miracle of quantitative easing, the Fed is buying those Treasuries back from the banks – thereby handing these institutions handsome capital gains on top of the free interest the banks collected while holding the securities.

The story is actually quite a bit more unseemly than it initially appears: There are currently 18 primary dealers that have the sole authority to buy and sell directly with the Federal Reserve Bank of New York, which conducts the Fed's open-market operations. All other banks and financial institutions – including such giant money managers as PIMCO and BlackRock Inc. (NYSE: BLK), and private individuals who buy or sell at the Fed – only do so as customers of the primary dealers.

The trading desk at the New York Fed is in constant touch with the primary dealers for input on markets and demand for securities. The dealers, of course, are in constant touch with their giant customers – as well as everyone else who matters.

The game goes like this …

Step I: Dealers and big institutional buyers of Treasuries all know the schedule of when the U.S. Treasury auctions new bills, notes and bonds (it's published).

Step II: They drive down the price of issues coming to auction by shorting enough of existing securities whose maturity they know is coming to market (it doesn't take a lot to lower prices, because all the dealers and customers are standing aside and waiting to buy later).

Step III: Since the dealers have lowered the price and raised the yield on existing securities, market buyers put in offers to buy from the Treasury close to the lowered prices for new securities.

Step IV: Once the new issues are bought at lowered prices, dealers and customers bid them up high enough so that when the Fed comes in under its announced schedule of quantitative-easing purchases to buy different maturity securities, the dealers sell back the now-inflated bonds held by them and their customers – netting a tidy profit in the process.

Who is paying these higher prices and providing the windfall to the banks?


The U.S. taxpayers, of course (in other words, you are).

A Look Ahead

The Fed is using credits backed by the taxing power that the U.S. Treasury holds over American taxpayers to hand the banks money to pay big bonuses and to start paying dividends again.

Why do they want to start paying dividends again? That's simple. By resuming dividend payouts, banks:


Will see their stock prices rise.


Will have more equity.


Will be able to leverage themselves more.

So they can take bigger risks in order to pay out bigger bonuses – much of which will be paid out in … you guessed it … each bank's stock.

That's the primary goal of QE2 -- enrich the banks. They're doing pretty well after the crisis they precipitated. Meanwhile, the almost $2 trillion spent on the first round of quantitative easing did nothing to reduce unemployment.

So while it's a given that the new round of QE2 will enrich banks, it's doubtful it will stimulate job growth.

There's another angle to this, too: The Nov. 3 announcement that QE2 would have the Fed buying $600 billion of securities through the end of the second quarter of next year wouldn't be completely accurate. The Fed will actually be buying nearly $900 billion worth of securities – if you factor in the reality that the central bank is buying more securities with maturing bonds running off its balance sheet.

While Congress might jawbone about forcing the Fed to abandon the part of its dual mandate to seek to maintain full employment, even as it attempts to keep inflation at bay, our elected leaders are just blowing smoke.

Our congressional representatives – the majority of whom have taken ungodly sums from financial-services industry lobbyists – are giving the banks what they paid for. And Congress likes the fact that if the Fed's QE2 initiative fails to cut U.S. unemployment, the blame can be passed to the central bank.

The sad-and-scary reality is that Congress has no policies to address fixing the economy or creating jobs. Our elected officials spend most of their time trying to get elected and re-elected. Given the latest political division in Congress, it looks like we're headed for more gridlock.

What's unspoken is that this scenario actually suits Congress pretty well. Because of their inability to create and implement desperately needed bipartisan policies to fix what's wrong with our economy and government, our congressional leaders get to punt policy decisions to their backroom masters, the Federal Reserve.

As long as the Fed is running this country, which it is, don't fool yourself: There will be no reduction in unemployment, and no job growth; the only industry that our central bank cares about is the one that it serves – the financial-services sector.

So if you're an investor who's currently "in" the market, here's how to bet: Banks will make a comeback, inflation will be a big part of our future in order to monetize our insane budget deficits, and there will be lots more trouble to come when the bubbles that the Fed is currently inflating finally pop.