Dear friends,

a recent letter from Ron Paul on the current Fed actions and its true implications.

by Ron Paul | March 31, 2008

These past few weeks have provided an unfortunate opportunity to discuss inflation. The dollar index has reached new all-time lows. The total money supply, M3, as calculated by private sources, is growing at a disturbing 17% rate. The Fed is pumping dollars into the economy at an alarming rate. Just recently the Fed announced new loan auctions totaling $100 billion. That is new money created from thin air. If these money auctions, combined with the bailout of Bear Stearns, continue to be the trend, we are in for some economic stormy weather. The explanation lies in understanding the basics of money, and why it is dangerous to give government and big banks control over it.

First, money is not wealth, in and of itself. You cannot create more wealth simply by creating more money. Wall Street bankers cry out for more liquidity, but what is really needed is more value behind the dollar. But the value, unfortunately, isn’t there.

You see, the Fed creates new money and uses it to purchase securities from banks. Flush with funds, these banks seek to put this money to use. During the Fed’s expansionary period, much of this money went to home loans. Through a combination of federal government inducements to lend to risky borrowers, and the Fed’s supply of easy money, the housing bubble took shape. Fannie Mae and Freddie Mac were encouraged to purchase and securitize mortgages, while investors, buoyed by implicit government backing, rushed to provide funding. Money that could have been invested in more productive, less risky sectors of the economy was thereby malinvested in subprime mortgage loans.

The implicit guarantee from the Fed is quickly becoming explicit, as those institutions deemed “too big to fail” are bailed out at taxpayer expense. Wall Street made a killing during the housing bubble, reaping record profits. Now that the bubble has burst, these same firms are trying to dump their losses on the taxpayers. This approach requires more money creation, and therefore debasement of all dollars in circulation.

The Federal Reserve, a quasi-government entity, should not be creating money or determining interest rates, as this causes malinvestment and excessive debt to accumulate. Centrally planned, government manipulated economies always fail eventually. The collapse of communism and the failure of socialism should have made this apparent. Even the most educated, well-intentioned central planners cannot plan the market better than the market itself. Those that understand economics best, understand this reality.

In free markets, both success and failure are options. If government interventions prevent businesses, like Bear Stearns, from failing, then it is not truly a free market. As painful as it might be for Wall Street, banks, even big ones, must be allowed to fail.

The end game for this policy of monetary inflation is that the money in your bank account loses purchasing power. So, by keeping failing banks afloat, the Fed punishes those who have lived frugally and saved. The power to create money is a power that should never be granted to government. As we can plainly see today, the Fed has abused this power, and taxpayers are paying the price.

Advertisements

Ron Paul warned us in the early debates, “We have lived beyond our means for too long, now we will be destined to live beneath our means”. We will see our prosperity dwindle, inflation erode our savings, heavier taxation and regulation hinders creation of new wealth and more government control of our lives in education, healthcare and everyday privacy.

March 26, 2008 10:37AM

Time to Listen to Ron Paul?

By Elizabeth MacDonald Fox Business News

Time to listen to Texas Congressman Ron Paul, the lone voice of reason in Congress today who’s got to feel like he’s shouting into a field of cotton with his repeated warnings about the dangers of a collapsing dollar, while the administration goes AWOL on the problem.

The dollar just hit a record intraday low against the euro on reports that consumer confidence levels have dropped to levels not seen since the post-Watergate era. It is down 7% year to date against the Chinese renminbi, it’s weaker than the Japanese yen and the Canadian loonie.

The joke is the greenback is now only stronger than the Mexican pesos and the Zimbabwe dollar, an overstatement for dramatic effect, to be sure.But since hitting a peak in 2002, the dollar has lost about a quarter of its value against a trade weighted basket of currencies.

A weak dollar acts as an anvil around the neck of the US economy and consumers. Rising inflation is essentially a tax on consumers, so are rising energy prices, and that double whammy threatens to undermine the purchasing power of the rebate checks due out in May–backed by printing even more dollars.

A bellwether event of significant import to our nation’s finances happened this past January 1 with little notice. That’s the day the first baby boomer was allowed to retire. A new federal report wearily warns once again for the umpteenth time that the nation faces some $60t in Social Security and Medicare unfunded liabilities alone.

We’ve heard time and again conservatives say deficits don’t matter. To say that deficits don’t matter is like saying ketchup is a vegetable or trees cause pollution.

The $406b we pay annually in interest on the $9t in federal debt alone would rank as the world’s 30th biggest economy.

That annual interest cost surpasses the gross domestic product of Belgium, and is bigger than the GDP of Denmark and Hungary combined. The $406b would cover the annual cost of investigating Medicare fraud.

Stack all those one dollar bills making up our $9t deficit (and that doesn’t include the $60t in unfunded liabilities for Medicare and Social Security) and you would reach the moon and back. “Printing money cannot create wealth, if it could counterfeiting would be legal,” economist Brian Wesbury has said.

Even Milton Friedman, the Nobel Prize-winning economist and a forceful advocate for laissez-faire economics, got so sick of the way central bankers were willy nilly printing money in the ‘70s, he advocated that the government should replace the Federal Reserve with a computer. “Money is too important to be left to central bankers,” he quipped.

Broad zoom: The US economy has spent all of a year and four months in a downturn over the last two and a half decades. During that time we’ve seen a market crash of 22% in 1987, the S&L crisis, four wars, three financial crises (Mexico, Asian flu and Russian debt crises), the blow up of the hedge fund Long Term Capital, two asset bubbles (dot com and telecom). Since the Bush tax cuts of 2003, the US economy added the equivalent of China’s GDP–and government spending has boomed.

Now Federal Reserve chairman Ben Bernanke has both cut rates at a breakneck speed and pumped a massive amount of monetary stimulus into the markets to cure the credit crisis. I still think he is doing his level best to fix a crisis not entirely of his own making. The question now is, will Bernanke yank the liquidity punch bowl when the economy returns to trend growth in 2010 or 2011 as the central bank projects?

Let’s hope so, because the case for a weak dollar is, to me, well, weak. Namely, that a lame greenback softens the housing and credit crises as it fuels profits at US exporters whose goods are now dirt cheap in the eyes of foreign customers. Strong foreign sales at places like Boeing and Caterpillar reportedly added 1.4% to US growth in the second quarter of 2007. But exports make up just 13% of GDP. Consumers make up a larger 70%.

It’s no surprise consumer confidence is as weak as it was in the ’70s. LBJ had promised this country it could have both guns and butter in the ‘60s, so the Federal Reserve gunned the printing presses to pay for spending on entitlement programs and for the Vietnam war. For the first time, too, politicians got their mitts on taxpayers’ Social Security funds, after Democrats passed a so-called “unified budget” in the late ‘60s.

All that spending caused the dollar to nosedive in the 1970s amidst an oil embargo that sent oil costs, priced in dollars, soaring. Paul Volcker, then Fed chairman, enacted rapid rate hikes hitting 21% by 1979, and the Treasury went so far as to sell $6.4b in “Carter bonds,” largely denominated in Deutschemarks, to prop up the dollar. Gold got ripped off its mooring of an average $35 an ounce in the ‘70s, and in 1980 it hit a record $835 an ounce, around $2,250 in today’s prices.

Gold acts as a dew line for inflation. We essentially have a good handle on how much gold there is in the world and potentially below ground. When gold rises in price, it signals we are printing too many dollars, which indicates a concurrent drop in the greenback’s value. Over the last seven years, gold and oil prices have risen in lockstep, up 239% and 267% respectively. If the dollar had also risen in value at the same rate, oil would be selling at about $30 a barrel.

But now central bankers say that because of the weak dollar, they’ve seen capital losses carved out of an estimated $12t worth of dollars they hold in foreign currency reserves. The fear is they may unload their $12t in greenbacks en masse to cut their losses and run–which would really tip the US into a protracted recession. Already reports out of China show government officials there willing to rotate future planned investments out of US treasurys into other investments.

Countries pegged to the dollar are rightly saying, too, that we are exporting inflation to their shores. Saudi Arabia is a land that has had nearly zero inflation since 1998, but recently inflation soared to 7% annually, despite the fact the country is flush with petrodollars.

Congressman Paul rightfully warns us when he says the US government has “systematically undermined” the US dollar by expanding “the money supply at will for financing war or manipulating the economy with little resistance from Congress–while benefiting the special interests that influence government.”

It’s not just the US gunning the mints. Goldman Sachs figures that three-fifths of the world’s broad money supply growth came from emerging economies over the past year or so. Three-fifths. That’s gigantic.

Goldman Sachs says the growth in Russia’s M3 measure of broad money grew 51% over the last year or so, India by 24%, and by 20% in China, Saudi Arabia, South Africa and Brazil. That’s three times as fast as the US and the rest of the developed world, and it’s faster than their GDP growth rates. It’s the fastest pace in decades.

All that loose money is pouring into commodities, stock exchanges around the planet as well as bond markets–it’s largely why our long-term bond yields have been historically low, spurring a dramatic increase in mortgage borrowing, as mortgage rates typically track the 10-year Treasury note.

Watch out here–emerging economies are just as susceptible to minting lots of money due to political pressures, including things like paying for wars, or calming local populations clamoring for higher pay and more jobs.

What can be done stateside?

The administration needs to state more emphatically that it supports a strong dollar. A stronger dollar would draw liquidity back into the credit markets, lower inflation risks, cut oil prices and restart economic growth, notes Bear Stearns economist David Malpass.

Presidential candidates vilify NAFTA and free trade, when the weak dollar is partly to blame for problems like jobs lost to overseas operations, Malpass adds.

“Empires fail because they run out of money, or more accurately, run out of the ability to spend or inflate,” Congressman Paul warns. “We need to control spending, immediately, before it is too late.”

ok, i said this would happen months ago, see my post from earlier.  the Fed and Federal government will bail out the banks, mortgage companies, bond insurers…who’s next? it appears free markets have been laid to rest. what we see is a nationalisation of the banking industry..aka more central planning. what we see happening is “socialism for the rich”

 so they didnt use the word “taxpayer bailout” instead they used financial engineering as a side step. first, the Fed is a lender of last resort and its main goal is to maintain low inflation and high employment. the recent $200 billion offer to banks  is a transfer of wealth from the poor and middle class to the very wealthy. when the Fed allowed banks to offer mortgage backed securities as collateral and the Fed traded quality treasury notes in essence the Fed took bad worthless debt and gave the banks clean cash. now when the mortgage back securities continue to fail (foreclosures up 60% last quarter), housing market continues to depreciate (13% last 6 months) these bad debts will be worthless and the banks will own the taxpayer back quality treasuries.

 this is how the Fed pulled over a taxpayer bail out.

look at the bear sterns…lender of last resort to now prime lender (your money). they bail out a failed bank…lets not forget how much the average person makes at bear sterns, hundreds of thousands of $$$…top bankers and executive management receiving millions in bonuses. so the Fed bails them out, lends more money to JP Morgan so they can buy it now at a steal of $2.00 a share.

this will quicken at a unprecedented rate…we..you..us…fellow Americans will bail out more than a trillion dollars. FYI: WE CAN NOT AFFORD ANY OF THIS. the dollar will continue to fall and savings of every American will be wiped out. inflation will rise and rise choking us. we will experience a hard recession for many years with inflation first, followed by stagflation. with our purchasing power declining due to a falling dollar and then higher prices and for sure higher taxes I say again we will become surfs to the state.

i urge you to write your congressmen and senators to ask them to repeal the Federal Reserve Act immediately. Join Ron Paul, Peter Schiff, Jim Rogers http://www.cnbc.com/id/23588079 Jim Cramer, and many more.

 something is happening to our economy and country that has never been witnessed before…..we wake up and fight or loose or our prosperity and our freedoms. join us in this great campaign for freedom, prosperity and peace!

I have warned about this for some time, this is not positive news, especially for the poor and middle class. Citibank announced recently that they will no longer allow depositors to withdraw more  than a $100,000 per month. So Citibank has taken first position on your money. Not a good time to keep money at a bank. also, not a good idea to keep savings in US Dollars..i recommend ETF’s in gold, silver, austrailian $, swiss franc, commiodities. Even if the return isnt high, these are great inflation hedges. if the dollar falls 5%..you just lost 5%. if the Fed keeps inflating the money supply as reported below soon inflation will eat you alive.

Thursday, January 24, 2008

Banks have NEGATIVE reserve ratios

The Federal Reserve published on Jan. 17, 2008 the bi-weekly report Aggregate Reserves of Depository Institutions and the Monetary Base.  I encourage you to review this report to see the actual numbers and trends.

The Federal Reserve published on Jan. 17, 2008 the bi-weekly report Aggregate Reserves of Depository Institutions and the Monetary Base.  I encourage you to review this report to see the actual numbers and trends.

A bank’s reserves is equal to the sum of borrowed and non-borrowed reserves.  Because the Federal Reserve acts as the lender of last resort the Federal Reserve system acts as one bank.

So, where are the required reserves coming from?  The Federal Reserve is printing the money out of thin air as shows up in ‘Term auction credit’.

Dec      11,613

Jan 2    30,000

Jan 16  40,000

This combined increase in one month of 81,613 compared to the monetary base of 820,331 is about 9.9%, or 119% annually, of the total money supply.  This is very serious inflation.

The Bottom Line

Instead of holding $18 of non-borrowed reserves the average bank in the US owes $1.70 to the Federal Reserve for every $1,000 to meet the required reserve ratio.  To continue meeting their required reserve ratio the banks are borrowing about $12.5B per week that the Federal Reserve prints out of thin air increasing the money supply by 10% per month.

Note:

After deeper research this is the first time ever in the history of the Federal Reserve that the non-borrowed reserves number has ever gone negative. The Fed has always been in control over the individual banks and held moral suasion over them which prevented them from borrowing to meet their required reserve ratio.

Bernake has said the ‘loans’ will go on as long as necessary and he has been increasing the size of them.

What makes you think the banks would ever want to repay these loans? They are a cheaper source of capital than anywhere else. The banks have now shifted the cost of their reserves onto the Fed who is then printing the reserves out of thin air. Because the Federal Reserve system functions like one big bank (whose required reserve ratio is now being printed out of thin air every week to prevent a bank run) and because the Fed has lost all control, they no longer have any moral suasion power, therefore hyperinflation is the only option to a bank run.

We’ve now officially entered the Weimar Germany phase.

Last night i attended my monthly working capital market group meeting headed by nations top economists and investors. Peter Schiff is a popular attendee as example. Here we discuss monetary and fiscal policy, capital markers, debt markets, bond markets, commodities and occasional mention of real-estate (mostly me).

 This group has long been bearish on the markets and very bearish almost gloom and doom on the global economy. We study and debate charts…charts…and more charts. Ive learned more about statistics and math in four months than all four years at college.

Ive mentioned this group in some post below and after last night the economic outlook went from bad to worse. This is being played out today in the news with the Fed finally admitting worsening economic trends. Ill go over some of the highlights of last nights meeting.

We are entering a perfect storm for a crash, last night we pointed out all the signals that point to a 1929 crash…..and they are ALL there.  In some instances we are in worse shape than 1929. Only variable that cant be seen on its effect is globalisation that did not exist in 1929.

We pointed out five demons that are to cause this crash.  1. National Debt: 9 trillion today, $70 trillion due in 20 years. This alone will keep us in a economic downturn for a decade. 2. Falling dollar: due to over spending, over borrowing and too much inflation (money supply). This is vital since a low dollar will not attract people or nations to buy our debt. This will cause interests rates to spike and taxes to go up. 3. Inflation: low interest rates and too much liquidity has caused too much mal investment and poor business decisions. Basically this easy money has created businesses that a true free market would purged. 4: Taxes: Americans now pay nearly 50% of the fruits of their labor to the government on all levels. Supreme Court Judge Marshall once said, “The power to tax, is the power to destroy”. 5. Over Regulation: this was just mentioned, but never got into details.

Above represents the macro picture of problems, now lets look at the micro level. The stock markets are starting to form their iron crosses and have entered a bear market and a long term sell-off trend.  Dow and NASDAQ are down 20%+ and S&P is close behind. We have officially entered a bear market and its only the beginning, we have another 30-40% correction built in. Companies will begin to report lower earnings and losses by 2nd quarter 2008. We are still only in the beginning of the sub-prime mess…it will get worse. There is already another bubble ready to burst…the credit card market.  Watch 2009 to see alot of pain and suffering with credit cards.

Alot of this is in relationship to liquidity. THERE IS NONE. BANKS ARE BROKE.  Each week, by law, banks are required to report there reserve ratios to the Fed and Congress. This ratio is derived by taking cash on hand and borrowed reserves. For decades banks borrowed from each other on the over night counter (fed funds rate) to cover there reserve limits. Banks stopped doing this late last year…why??? Then the federal reserve lowered their discount rate and created a “private auction”. The reason banks no longer lend between each other is simply because they have NO CASH to lend. The reserve ratio by law needs to be above 1.0.  In times of a recession where you hope banks inject liquidity, this ratio can go as low as .6 well….the last reported numbers from banks in december had them in negative territory. Then all of a sudden they all stopped reporting this mandatory weekly ratio…its the law for any charted bank. THE LAW! Past two months…..nothing! and no outrage from the Fed or Congress. Why??? because if you knew banks had no cash, nothing, nada, flat broke…what would you do?  There would be a bank holiday…run on the bank. 1929 all over again.

Taking this into consideration, falling dollar and intense national debt. the government and the Fed are nearly powerless to avert the coming crash…they created it. The Fed cant lower rates much more, they will, but there will be a limit. Lower too much and the dollar will crash. Dollar loses too much value, all our creditors around the world will dump dollars and we will have hyper inflation..20%+. We cant keep borrowing money to pay the bills, especially with low interest rates….they will have to rise sharply. Imagine credit cards at 30%, car loans at 20% and mortgages at 15%…we borrow $9 trillion, we have to pay it back some day….some how. The market is ALWAYS stronger than the Fed and government, no matter how much they get involved in our economy…which is why they should not be involved period! The market is going to send us all a strong message in late 2008, early 2009. We have lived beyond our means with guns and butter, so we will be destined to live below our means from then on.

Not that the Fed and government has already screwed us….there are talks that the US Government and the Fed will take a unprecedented step of buying a broad range of assets, including stocks and other equities. This is being discussed because everyone knows the Fed and Washington are scared, they know we are “f*****”! This policy is nothing more than the largest buyout in history, it will involve more than a trillion dollars and a huge devaluation of the dollar. Ok, so good bye any savings you have and a tax burden of unmeasurable value. (dont forget that $70 trillion coming in 20 years). We will become surfs to the state. We and future generations will have to work longer, harder for less. It may even be the end of such a empire….one only needs to look at history of great empires…the road to Rome.

So…what does one do? first get out of the stock market unless you absolutely know how to position oneself. This involves alot of options, leaps and how to play the bond market. This was discussed heavily last night, but over my head and personally dont care since im 100% out of the stock market. Next, get out of dollar evaluated securities such as IRAS and Mutual Funds….they will drop like a rock in a crash, especially with the falling dollar. If the dollar falls 10%…you just lost 10%, that simple. The dollar has lost more than 20% of its value past year…inflation is on our door-step.

Go into hard assets such as gold, silver, platinum, commodities such as wheat and corn, real-estate, especially commercial and a basket of currencies. The Canadian and Australian dollar are highly recommended. As is Swiss Franc and the Chinese Yuan if you can get it.

Mindful this economic crash will follow into Europe then into Asia. Alot of the economists at this meeting are predicting a 7-10 year fall-out.

Dont forget our lovely welfare check we will be getting in May, more borrowed money…yeah!!! the only place you should park this $600 is pay down debt or buy gold.

I cant wait till next months meeting, alot can happen in 30 days.

Video above is last part of MTV/Myspace dialogue from Saturday Feb. 2nd.

Describes exactly why Ron Paul is different among all the “we are change” candidates. when they mention “change” its really tinkering. what we will see is ALOT of the same. Problem is we cant afford it anymore, neither can we afford to loose any more civil liberties.

Ron Paul simply wants the government out of our lives, out of our economy and out of the lives of other people around the world. Government has failed. Socialism has failed.

Why does the federal government need the Dept. of Education, Energy, Labor, DEA, Homeland Security…etc…they have no authority under the Constitution, not in a FREE society where individuals take personal responsibility and self reliance.

Collectivism won in the 20th century, lets work hard to ensure freedom and individual liberty win  the 21st!

HR 1955, Risk to our Liberties

Glenn Beck with Peter Schiff on the Recession

Glenn Beck with the GAO on the Financial Crisis

Our Economic freedoms are at risk, then our liberty and freedoms. There is only one voice that will address this…Ron Paul.

Freedom…Prosperity and Peace!

Its now or never