Forget about the $50 billion Madoff Ponzi scheme. Forget about the $8 billion Stanford Ponzi schemes, forget about the $3.6 billion of bonuses paid to Merrill Lynch executives after the firm’s failure, and forget about the $200+ millions paid out to AIG executives. The biggest stock market scam of the century is now underway, hatched, given the stamp of approval, and about to be executed by Central Banks worldwide. Though this scam will undoubtedly be bigger than all the revelations of previous scams combined, this scam will engender less public anger, less disbelief, and less protest than any one of the recent individual scams, because very few people will understand it.
The Failure Of Special US Federal Reserve Programs
To understand the biggest stock market scam of the century, we must first pause for a moment to understand recent history. The US Federal Reserve, in an attempt to turn the US economy around, first extended hundreds of billions of dollars of credit to US financial institutions through facilities like TALF (Term Asset-Backed Loan Facility), TAF (Term Auction Facility), AMLF (Asset Backed Commercial Paper Money Market Fund Liquidity Facility), MMIFF (Money Market Investor Funding Facility), and the CPFF (Commercial Paper Funding Facility).
The Failure of the $850 Bailout Plan
When these above programs collectively failed to stimulate the economy, then US Treasury Secretary and former Goldman Sachs CEO Hank Paulson offered up an $850 bailout plan to US Congress in September 2008. In criticism of this bailout plan, I scripted an article on September 21, 2008 called “The Largest Robbery of the 21st Century”. In this article, I stated that US Treasury Secretary Treasury Hank Paulson’s claim that there was “no intent to nationalize US mortgage institutions [Freddie Mac and Fannie Mae]” because they were still very much viable institutions was disingenuous, ludicrous, and a purposefully misleading statement intended to defraud millions of investors. In response to Paulson’s ludicrous claim, I stated, “the official cost of the $200 billion for the bailout of Fannie Mae and Freddie Mac is highly delusional and grossly underestimated. The final cost is much more likely to be north of $1 trillion.” [author’s comment: $200 billion was the figure that then US Treasury Secretary Hank Paulson was selling to the American people as the total cost to bailout Fannie Mae and Freddie Mac].
As I’ll explain later in this article, the costs to bailout now nationalized Freddie Mac and Fannie Mae, has already ballooned to a figure well north of $1 trillion and we’re still counting. Unfortunately, it appears if the largest robbery of the 21st century will now be surpassed by an even greater robbery.
The Failure of US Federal Reserve Interest Rate Cuts
As I predicted above, because the intent of the $850 billion bailout plan was always to transfer wealth from American taxpayers to Wall Street and big banking executives, the bill thus far has been an utter failure other than its successful redistribution of US taxpayer money to Wall Street and US financial executives. Whether the intent of this bill changes at all under the Obama administration remains to be seen. When this bailout plan failed to reinstate consumer confidence and US and global stock markets continued to plummet, the US Federal Reserve opted to emulate Japan by cutting the key interest rate in the US, the Fed Funds rate, to virtually zero, even though the Bank of Japan’s decision to do so created more than two decades of recession in their own country. The Feds then entered stand-by mode for a couple of months to observe if slashing the Fed Funds rate to 0.00% to 0.25% would be enough to turn around the US stock markets.
The Failure of Recent US Treasury Auctions
However, after it became clear that this series of desperate rate cuts would accomplish very little, the US Treasury embarked upon an ambitious plan to raise money for US government bailout programs by holding record size auctions in US Treasury bonds and notes in March of 2009 despite dwindling global confidence in the US dollar. (To read about my predicted failure of these interest rate cuts, refer to my September 19, 2007 article “Why the Fed’s 0.50% Rate Cut Won’t Save the Markets” and my January 24, 2008 article “The 0.75% Federal Reserve Interest Rate Cut: A Recipe for Future Disaster”)
As a means to raise cash for the US government, the most recent US Treasury auctions were largely a failure, as purchases of longer term notes and long-term bonds were revealed to be weak among Primary Dealers. Of $17.9 billion of 30-year Treasury bonds tendered in this month’s most recent US Treasury securities auction, Primary Dealers only accepted $4.8 billion; of $31.7 billion of 10-year Treasury notes that were tendered, Primary Dealers only accepted $13.0 billion. (Source: US Department of Treasury).
The Nuclear Option is Now in Play
Although the above review of the failures of recent US monetary policy decisions is brief, a discussion of the extent and breadth of attempts to revive the US and global economy without sustainable success is important to understand the critical nature of the next phase of monetary policy decisions. I have opted not to discuss the reasons for the failures of these attempts in detail in this article as the linked articles above discuss in greater detail the reasons why these programs were and are destined for failure, With monetary policy options nearly exhausted without any sustainable results, the US Federal Reserve signaled to the world its willingness now to place the nuclear option, the risk of severe monetary supply expansion, in play now.
On March 18, 2009, the US Federal Reserve announced that it would step in and support the fledgling market for US Treasury bonds with a $300 billion purchase. In addition, they announced that they would also purchase $1.45 trillion worth of Fannie Mae and Freddie Mac securities as well. And believe it or not, there’s more. Over the weekend, in an effort to shore up the quickly-heading-to-bankruptcy fate of the big banking sector in the US, the US Treasury and the US Federal Reserve have allegedly been seriously discussing the commitment an additional $1 trillion to buy toxic US banking assets that are essentially worthless.
Before I proceed with the explanations of why this scam will overshadow all previous scams to date, let me be clear that understanding and predicting the progression of this crisis has not been difficult as long as one steers well clear of the squawk boxes on CNBC and the mainstream financial media. As a prime example, consider that in response to the $300 billion Federal Reserve commitment to buy US Treasury securities, Sung Won Sohn, an economist at California State University, declared, “this is going to help everybody”. By my analysis, this decision will help virtually no one.
In any event, the real problem lies in the answer to the question, “Where exactly is the Federal Reserve getting all this money that may end up expanding their balance sheet by more than $3.5 trillion in a relatively short period of time?” Certainly the $300 billion commitment to buy 2-10 year Treasury notes to shore up the Treasury securities markets will almost certainly be printed out of thin air, not only expanding the monetary base but also the monetary supply. Furthermore, there is also a very strong probability that much of the trillions of additional dollars that the US Federal Reserve is committing to Fannie Mae, Freddie Mac, and major US banks will also end up being printed out of thin air, thus significantly expanding the current global monetary supply. If we take a look at the explanation for where the $1 trillion to buy toxic bank assets is coming from, here is the breakdown we are given thus far: $150 billion from TARP, $850 billion from the FDIC in the form of debt, and $30 billion from hedge fund and pensions fund managers.
To realize how foolish the funding for this plan is, consider that the FDIC’s capitalization plunged by 64% in 2008 to a lowly $19 billion, due to the failure of IndyMac and other US banks. At the end of 2008, $19 billion represented a tiny 0.4% coverage of US banking assets. Frankly, the FDIC’s extremely leveraged position is every bit as precarious and dangerous as the leveraged positions that caused AMBAC, MBIA, AIG and other US financial institutions to collapse. Throw in the fact that the FDIC’s leveraged position has grown even greater because of the 18 US banks that have already failed in 2009, and it doesn’t take a genius to figure out that there is no sane methodology to the FDIC assuming an additional $850 billion in debt. Even if the Depositor Protection Act of 2009, appropriately also known as the Dodd-Crapo bill, eventually passes and grants the FDIC $500 billion in additional funds to shore up its risky capital situation, this will likely be another $500 billion created out of thin air. Frankly, it doesn’t matter if you want to call this quantitative easing or debt monetization, the end result will very likely be the same — massive increases in monetary supply.
So it is with great confidence that I state that the end result of all these above actions will not bode well for the average investor, even if the end result is a global stock market rally. Why? Global stock markets can NOT experience significant recoveries in the near future without accompanying significant devaluations of global fiat currencies, because the fundamental problems of the economy are not being addressed in any of these proposed solutions. As I’ve stated many times before, no government in the world has yet implemented a single, sane policy directive that addresses the root cause of this global economic meltdown — an unsound monetary system. Thus, major global banking institutions worldwide are still as fundamentally unsound as ever despite recent bounces in stock prices. I am quite confident in saying that throwing a freight ship cargo of money at these institutions will not fix any of the problems that have made them unsound, will not improve in any capacity, their risk management procedures, and will not contribute to solving the massive global problem that is the largely unregulated $600 trillion derivatives market.
The Currency Race to the Bottom has Officially Begun
And lest we make the mistake of believing that it is just a foolish agenda that the US Federal Reserve is currently pursuing, the Bank of England, and the European Central Bank along with select EU Central Banks such as the Bank of Switzerland, as well as may Central Banks in Asia have also engaged in equally destructive monetary policies as of late. And as if this was not enough to put the fear of God in everyone regarding the fate of fiat currencies around the world, according to the UK Telegraph, UK Chancellor of the Exchequer Alistair Darling has been meeting with senior US Treasury members to finalize a plan for the International Monetary Fund (IMF) to issue hundreds of billions of dollars of a digital form of money called Special Drawing Rights (SDRs) to world governments.
Basically, this IMF directive is a duplication of the Federal Reserve’s plan of flooding US financial institutions with the creation of new dollars, with digital SDRs assuming the role of the US dollar, and the IMF assuming the Federal Reserve’s role of money supply expansion. Under the direction of US Treasury Secretary and ex-New York Federal Reserve Branch President Timothy Geithner, the global financial monetary system has quickly sucked all major players into a destructive currency devaluation race to the bottom.
To explain why the counterintuitive notion of a recovery of global stock markets encouraged through foolish monetary policy instead of a concerted effort to fix the broken global monetary system is bad for every single person invested in traditional stock markets anywhere in the world, I am going to use a chart to illustrate my point.
In this chart, I’ve reconstructed the performance of the S&P 500 on a non-inflation adjusted basis versus an inflation-adjusted basis for the period beginning January, 2003 until March, 2009. In constructing this chart, I did not use the US government’s officially reported inflation numbers for the time period represented because the government’s reported numbers are not at all representative of true inflation. Over the past two decades, under the direction of Alan Greenspan and the Clinton administration, the formula used to calculate inflation in the US has been changed so many times that it no longer remotely resembles the inflation formula that was once used.
Due to these changes, official US government inflation figures have become grossly distorted and erroneous and have not remotely resembled the true rates of inflation for at least the past two decades. Consequently, I have used the official US government Bureau of Labor formula from 1980 to determine inflation rates in the construction of the above chart, for the 1980 formula more closely represents true rates of inflation. Using the 1980 formula, inflation rates from 2003 to 2009 varied from 8% to about 13%. In 2004, when the S&P 500 gained about 9%, the true inflation rate was also approximately 9% for the year; thus, the inflation-adjusted S&P 500 index shows zero gain, and so on. Please note that there are other factors, for the sake of time, that I did not take into account, like capital gain taxes in the inflation-adjusted index that would further deflate its gains (so in reality, the inflation-adjusted gains as indicated in the above chart are actually too generous). As well, for the sake of time, I did not seek exact monthly CPI numbers for each year using the 1980 US Bureau of Labor formula to determine each year’s true rate of inflation but merely used an annual approximation of the inflation rate. Still, even though I constructed this chart with a slight margin of error, this is irrelevant to the point I am trying to make, as the point of the chart is still very much valid.
The chart above illustrates the importance of always taking into consideration the effects of monetary supply expansion into real returns. Without taking into consideration the effects of monetary supply and inflation, for the past 6+ years, if one was invested in US markets, despite the enormous recent decline in these markets, one may falsely believe that one has only lost about 23%. However, if you now take into effects the serious devaluation of the US dollar during this same time period and the effects of this devaluation upon your purchasing power, your 23% loss suddenly becomes a much harder to swallow 65% decrease in real wealth. Now consider that all major Central Banks around the world are actively engaging each other in a game of financial chicken that almost certainly will make the currency devaluation of the last 6 years appear mild in comparison to the effects all of us will feel through this “invisible tax” in the near future.
Thus, should major global markets rise significantly, this event will almost certainly be accompanied by major devaluation of all major global fiat currencies. One must realize that a 20% bump higher in US stock markets is of absolutely no benefit to an investor, if this bump higher is solely caused by a 20% devaluation of the US dollar, or heaven forbid, a 30% devaluation of the dollar. Likewise, a 20% bump higher in the ASX index in Australia is of zero benefit to any investor if the Australian dollar has devalued by 25%, and so on. And once you figure in capital gain taxes that will be paid on illusory returns in global stock markets if they materialize, the real wealth of investors will have been eroded even further. You can be assured that if you live in the UK, Germany, Spain, Canada, Brazil, or any other major global capital market, that this situation also applies to you as an investor. It matters not if the valuations of these indexes increase the amount of US dollars, Canadian dollars, Brazilian reals, or Euros in your pocket. What is the ultimate measure of real wealth is the purchasing power of your money. If this has declined significantly, then you may be left with a greater amount of money but in a financial nightmare that has actually left you poorer.
However, I am still unconvinced that we have yet seen the bottom of major stock markets around the world. If we do receive a global stock market rally for several weeks or months, surely this event will be accompanied by joyous headlines in all major financial media outlets declaring the crisis as over. But after reading this article, you should know better. This is the conundrum we face today – rise or fall, and it still remains a possibility that a significant rebound of 20% or higher may not even materialize despite the nuclear option being unleashed – being invested in traditional stock markets is likely to be terrible to the bottom line of your real wealth. Large profits will still be made in this environment, but the best ways to invest in gold and silver and other select commodities, and not traditional markets, are likely to produce them. As the race to the bottom for fiat currencies progresses, gold and silver should finally have their day in the spotlight, and the likelihood that price suppression schemes against gold and silver in the COMEX futures markets will remain as effective as they have in years past will diminish as the present monetary crisis grows in seriousness.
In conclusion, if a US Federal Reserve inspired bounce occurs in the US stock markets, if a Bank of England bounce occurs in the UK stock markets, if a ECB inspired bounce occurs in any European stock market and so on, this is a doomsday scenario for investors as it can only happen if the Central Banks’ plan of money supply expansion and monetary valuation implosion succeeds. And if it does, they will have pulled off in essence the biggest stock market scam of the century under the guise of a massive global monetary devaluation scheme that very few people will fully understand. Realizing the implication of the above charts as well as the likely effects of these Central Banks policies on the world’s money supply should scare the hell out of everyone to a far greater degree than $50 billion Ponzi schemes and $200 million bonuses to failed financial companies.
In writing this article, I am not asking anyone to blindly agree with me, but I do hope that this article inspires enough of you to forward this article to everyone you know so that we can foster a truly intelligent debate about this matter. In the process of starting an intelligent debate, we will educate instead of misinform, gain more clarity about the origins of this crisis instead of shrouding it in secrecy, and ultimately, illuminate the true culprits of this deepening global economic crisis — the Central Banks.
