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.

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.

walk down to Wall Street today with a Ron Paul sign and you will get cheers. Nearly every serious investor and economist have jumped on the Ron Paul freedom, prosperity and peace campaign. Just ask Kudlow and crew.

 Cramers Mad Money is a bit more show than substance, but still smart. please enjoy the clip.

recent Ron Paul endorsements are Andrew Sullivan, Dan Lesko, Kurt Loder and Tucker.

Join this campaign!

ive been a fiscal conservative for all my life, as long as i know. the last few years ive been mentioning (not warning) how we can not maintain our current monetary and fiscal policies. it is simply unsustainable. past 6-9 months ive been turning the heat up and pushing the threat level to warning. point is we are heading for serious trouble. who ever is President come November 2008 will play part in a global financial meltdown. I have to admit, even if its Ron Paul. only difference, he knows why and how we got here and what will need to be done. Im going to include some insight from Bill Fleckenstein a MSN Money columnist. Please stop listening to main stream media financial reporting, its more entertainment than fact.

 He writes: “The global credit bubble is bursting. This bubble is primarily leverage financing for owning risky assets. The people who were responsible for what happened played with other people’s money, marketed arcane financial products with false promises of fat profits, but stuffed their own pockets with big bonuses. Neither these masters of the universe nor their greedy but naive investors deserve to be bailed out. They deserve what is coming to them.

“Markets have been taking more risk than they should because they believe that central banks will come to their aid during times of crisis, like now. The penchant of Alan Greenspan, former U.S. Federal Reserve chairman, to flood the market with liquidity during financial instability is the genesis of this ‘central bank put.’ As long as this expectation remains, financial bubbles will occur again and again. Now is the time to act. Let the crooks go bankrupt. Central banks should bury the Greenspan ‘put’ for good.”

Rather than being a liquidity crisis like the 1998 failure of Long-Term Capital Management — which was more like a run on the bank and was stemmed by the powers that be — Roubini describes the current situation as a “liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the U.S. and global economy.”

“We are indeed at a ‘Minsky Moment‘ and this recent financial turmoil is the beginning of a much more serious and protracted U.S. and global credit crunch. The risks of a systemic crisis are rising: Liquidity injections and lender-of-last-resort bailout of insolvent borrowers — however necessary and unavoidable during a liquidity panic — will not work; they will only postpone and exacerbate the eventual and unavoidable insolvencies.”

That is the danger that’s been created by the government talking about bailing out the housing market: A multitude of people decide to join the party and not pay. This is a slippery slope we’ve been going down for a long time, and it looks at long last like the problem will be too big to bail out. Bottom line: The dislocation and pain are starting to be felt throughout the financial system. We are headed to a lot of financial turmoil, and there’s no getting around that.

Could the fall of Rome hit home?

Lastly, in a sad commentary about where we are as a country, U.S. Comptroller General David Walker was quoted Tuesday (also in the Financial Times), as follows: “Drawing parallels with the end of the Roman empire, Mr. Walker warned there were ‘striking similarities’ between America’s current situation and the factors that brought down Rome, including ‘declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.’ ”

Unfortunately, it seems to me that he is dead right.

I have been saying this for years. We have been living well beyond our means, Americans are only enjoying this lavish lifestyle on borrowed money, not true wealth. The GNP is a measure of all wealth produce within a country. For the past 30 years we have tacked on $9 trillion in debt, our economic growth is solely based on debt. Not to mention all the money pumped into the money supply by the Fed. We have achieved wealth and growth simply by borrowing and inflating the money supply. The US no longer produces true wealth as in hard assets. We are only worth our dime on paper. Reminds me of all the millionaires during the Tech Boom. Worth $5mm on paper and after everyone realized that was fantasy, it all got wiped away.

Well, we are seeing that now. the housing crisis is upon us, oil going to top $100 brl, reversal of the Treasury yield, insolvency of the financial sector, the dollar is crashing and inflation is ever creeping up. The only sanctuary is Gold topping $800 ounce. Why…this is the only hard asset.

Ive mentioned this before. We have $60+ trillion in entitlements due in my generation. Please watch the 60 Minutes episode above which explains this pending disaster.

The founding fathers when writing the Constitution knew of the destructive power of money. They wrote the Constitution to limit the size and scope of government. Restrain the government, not the people. The Consitution even mentions that Congress is the only entity that has the power to issue legal tender, which can only be that of gold and silver. The founding fathers were strict on this because they knew if you gave the government a blank check, they will use it to grow larger and more powerful. Congress created the Federal Reserve in 1913 by the pressure of the nations largest banks to turn over control of monetary policy to a private bank that even today does not share its operations with Congress. The IRS deposits your tax money into the Fed, not the Treasury. The Fed takes your money and lends it back to you and the government with interest. This is a distribution of wealth from us to to the wealthy.

The current Fed Chairman Ben Bernanke revealed to Congress that the current fiscal policy of the Federal Government in relation to spending, taxing, borrowing and entitlements are unsustainable. He agreed that we can not grow out of this problem.

The income tax only accounts for 1/3 of govt. expenditures. We have to borrow and print money to arrive at all the shortfall. So I say this, especially to all my liberal friends who believe in government entitlements, in order for us to avoid bankruptcy, the GAO predicts the income tax would have to be raised to at least 65%. Now i ask my freinds, are they willing to give up that much income? Now the same goes for the Republicans, the Neo-Cons.  If they continue with their planned foriegn policy, it measures out to the same dilema. The current race so far has a Rudy-Hillary campaign. If you look at their records and their plan once President, it has nothing to do with solving our imminent despair. They are typical politicians who like power and plan on keeping that power. They will say and do anything to get your vote and to enure they get re-elected.

What ever happened to the philosophy of voting for a President that encourages and believes in the US Constitution. We need a President who  will reduce the size and power of the Federal Government to a time when people, not lobbyist made decisions on how to live our lives. Return fiscal responsibilty to Washington. Put a end to unconstitutional laws such as the Patriot Act, National ID, Military Commissions Act and many more. Abolish federal departments that are not granted under the constitution; Department of Energy, Department of Education, Homeland Security and a few more. The reason we are in this mess is the Federal Government has been doing alot of “stuff” that it has no authority to do. We the people have given up so much to a Government that has put our great country only on a path to ruin.

I feel the next gerneration of Americans and ours will see the end of this great Republic. The pending financial crisis will ensure great political upheaval. Instead of people taking back the responsibilty for their own lives, the government will only desire more power. In the Patriot Act, there is an amendment that gives direct power to the President to enact Marshall Law at any time their is a foriegn or domestic threat to national security. I would not be surprised this over extentsion of executive power being used by our next President. Their are hard times ahead and the government is preparing to protect itself, what about US?

I am sorry to say we are moving toward tryanny. Our liberties and our way of life will be threatened like no other in the next 20 years. Do we allow this to happen? or do we say no to staus quo and to politicians that rather listen to special interest and lobbiest. Their is not one candidate on both sides that has the courage and willingness to stop this.

Ron Paul, a true conservative, a true republican, a honest and true American. There is hope, it only takes courage. Join, before its too late.

i have been to a few of Ron Paul’s campus visits and its like going to a rock concert….loud!

young people see what the end of this long and winding road has in store for them.. they will have to work harder, longer, even less job security, no real wage growth and a lifestyle less fitting than any generation previous. not too mention loss of more basic liberties.

we have $60 trillion in entitlements due in the next 20 years, we are already $9 trillion in debt and borrowing more than $3 billion a day to pay for our warfare-welfare state. where are we going to get $60+ trillion????

then the Federal Reserve just prints money out of thin air to come up with all the shortfall in our spending. this causing inflation which lowers the value of our dollar and spending power. this is called the inflation tax. a distribution of wealth from the poor and middle class to the rich.

all the above spell doom and gloom for our country’s future, especially our young. in the NY Post(10/31/07) NYC Mayor Bloomberg is forecasting this very scenario and has issued a warning. unfortunately too many are just laughing it away.

the problem is neither party candidates have a solution. the Democrats will tax and spend us to oblivion, while the neo-cons will borrow and spend us to ruin. i see both being utilized by both parties. they love power and YOU love “free” stuff. it will all come to an end, all too soon.

this is why young people are rallying behind Ron Paul. they know, they see and they want to fix it NOW.

http://www.msnbc.msn.com/id/21521415/

here is a great article from a rally in Iowa University past week. explains very well this phenomenon with young Americans.

cheers