Tuesday, January 4, 2011

Is the Federal Reserve Really Purchasing Over 60% of 2011’s Fiscal Deficit? In a Word, uh . . . Yeah.

The other day, in my post “The Lull Before the Storm”, I mentioned that for fiscal year 2011, the Federal Reserve would be purchasing over 60% of the Federal government deficit.

In other words, the Fed would be dancing the Monetization Waltz, just like Latin American countries used to back in the 1970’s: Proof positive that America is indeed a banana republic—only with nukes.

A lot of people didn’t believe me—or wanted me to check my figures. Or wanted to know if I was having an acid flashback from those aformentioned 1970’s. A lot of people couldn’t believe it.

Mark Twain said it best: There are lies, damned lies, and statistics. If you want to deceive your audience, you source your numbers from some shifty salesman with an ideological ax to grind, gussy it up with percentage signs and charts and graphs, and thereby “prove” any damned foolishness you like.

But deceit in this context serves no purpose: It’s in all of our best interests to know exactly what is going on, in fiscal year 2011. 

So in this brief post (yes I know—shocker), I’m gonna check the figures for my observation—but I’m gonna get ‘em right from the horse’s mouth: From the White House, and from the Federal Reserve. 

To begin—

White House FY 2011 Budget Deficit Projection

The 2011 fiscal year runs from October 1, 2010, to September 30, 2011. According to the White House’s budget, the budget defict for that period will be $1.267 trillion. Source is here, on the second page of the document (which is marked as page 146).

This does not include the extension of the Bush tax cuts.

Federal Reserve Treasury Bond Purchases via QE-lite and QE-2

According to the Federal Reserve in its August 10, 2010, announcement, the excedent from the mortgage backed securities and other assets that the Fed purchased as part of QE-1 back in 2008–‘09, started to be reinvested in Treasury bonds starting in August of 2010. This is what is known as QE-liteSource is here.

The Fed is notoriously shifty as to the exact composition of its balance sheet. Credible source estimate that QE-lite will be between $200 and $300 billion in the year starting in August 2010. Sources for this estimate are here, here and here. No one seriously doubts this range of figures.

QE-lite purchases would have totalled between $16.7 billion and $25 billion per month. Excluding the months of August and September 2010 (which are not part of FY 2011), total QE-lite from October 1, 2010, to August 30, 2011, when the policy by the Fed’s own announcement is supposed to end, will have been between $167 and $275 billion.

Please keep in mind what QE-lite is and is not: QE-lite is reinvestment of excedent—it is not money printing. But this money that can be reinvested originated in QE-1, since this was how the MBS were purchased by the Fed in the first place—and QE-1 was money printing.

So some people might reasonably argue that QE-lite in fact is monetization, while others could reasonably argue that it is not monetization.

All can agree, however, that QE-lite will help the Treasury Department finance the U.S. Federal government deficit, because that’s what the Federal Reserve is going to do with QE-lite—buy up Treasury bonds.

For this discussion, that’s all that matters.

Now with regards QE-2: According to the Federal Reserve’s own statement of November 2010, Quantitative Easing-2 will be $600 billion over eight months, starting in November 2010 and ending in June 2011—firmly in FY 2011. And unlike with QE-lite, the Fed outright said exactly how much it would purchase for QE-2—$600 billion over eight months. Source is here.

The language of the statement left the door open for further Treasury bond purchases by the Fed beyond its self-imposed $600 billion limit. But for the purposes of this discussion, let’s ignore that possibility, and simply take the Fed’s statement at face value: $600 billion, and no more.

Now, QE-2 is monetization—indisputably: It is the creation of fiat money out of thin air, in order to finance the government’s expenditures. It is the very definition of monetization.

Application of Basic Math

Taking the last first, QE-2 represents a direct monetization of just shy of half of the Federal government’s deficit for 2011. The math is: $600 billion divided by $1.267 trillion equals 0.4736.

In other words, 47.36% of the Federal government’s deficit for fiscal year 2011 will be financed through the creation of money by the Federal Reserve.

As to QE-lite, if you take the conservative figure of $200 billion for the total August 2010 to August 2011 period, and exclude the first two months (since they’re not part of the fiscal year 2011), you get $167 billion of total Treasury bond purchases by the Federal Reserve during fiscal year 2011, as part of QE-lite.

Again, basic math applied on the $1.267 trillion deficit gives us a percentage of 13.15%. If we use the $300 billion figure for QE-lite, exclude the months of August and September 2010 as before, and divide it by the $1.267 trillion deficit, we arrive at 19.73%.

So conservatively speaking, the Federal Reserve will directly finance no less than 60.51% of the U.S. Federal government’s deficit for fiscal year 2011. That figure might be as high as 67.09%, depending on the size of QE-lite.

These are the official numbers—as promised, none of these are dodgy numbers from the disreputable sources ax-grinders like to use. These numbers are straight from the horse’s mouth: The White House, and the Federal Reserve.

Verbose Conclusion

With a single market participant buying up at minimum 60% of new issuance, the conclusion is obvious: The Treasury bond market is Bernanke’s bitch. His pimp hand is all over that ho’—and she be doin’ whatever Benny the Pimp wants her to do, as often as he wants her to do it.

Therefore, since Treasury bond yields during FY 2011 will be whatever the Fed wants them to be, they are no longer a reliable indicator of anything.

Quite the contrary, the bond markets will mask problems of the underlying economy until they are insurmountable.

This shouldn’t be a controversial observation: A single market participant that is purchasing 60% or more of a market owns that market. So anything that that market ordinarily signaled—be it risk, instability, whatever—is now no longer the case. The only thing that market will reflect is whatever fixed idea the Market Pimp will want it to reflect.

Therefore, since any problem that the Treasury bond market might ordinarily reflect will be masked until the very last minute, watching that market for signs of the health of the wider economy will only distract from what is actually happening in the wider economy.

Succinct Conclusion

The Treasury bond market is like a concrete highway over a sinkhole: You won’t realize anything is amiss, until the road suddenly disappears.

Like this—

As a confirmed hyperinflationista, please click here to read my insane ramblings on the subject


  1. I agree with you that the fed seems to own the market.

    On the other hand, (isn't that how economists talk?) rates went up when the fed said their intention was to make rates go down.

    So, is the fed really bigger than the mkt?

  2. We don't know what will happen after June. But for the next 6 months the Fed is paying for close to 100% of the deficit. After that I expect there will be so many people that no longer "roll over" their bonds that the Fed will end up buying more than 100% of the deficit amount. There are so many short term bonds that will be coming due that the Fed will have to buy like crazy. There is no way spending could be cut or taxes increased to deal with all the bonds coming due. Hyperinflation should start as the Fed passes 100% of deficit.

  3. The initial Treasury auction has been nearly fixed for a while anyway. The primary bidders are essentially obligated to take the entire auction, and most have buyers for as much as they can buy anyway. With the Fed (I think) stepping in at the auction, that manipulates the auction.

    From what I can tell (and that's not much), the rate rises are secondary market driven, which the Fed can manipulate but doesn't help out the Treasury any.

    The real fun (as in shooting and looting) starts when the Fed backstops the secondary market after a serious downturn, and a major player (the Arabs, China, Japan, etc.) decides to name that tune.

  4. I believe the lies, damn lies, and statistics quip goes back to Benjamin Disraeli. But no doubt Twain would have loved it!

  5. FYI: The "lies, damned lies and statistics" quote was popularized by Twain, who attributed it to Disraeli—but there's no evidence Disraeli ever said it. Interesting, no?

    See here: http://en.wikipedia.org/wiki/Lies,_damned_lies,_and_statistics


  6. This weekend I saw a bunch of talking heads on the Sunday shows saying things like, "we are headed for a fiscal train wreck", and, "the current path is unsustainable", etc.

    But, nobody seems to have the number. I guess $14T isn't the number, because as I understand it, we just passed that and the stock market is at yearly highs.

    Looking back a few years or even decades, I think most economists would have said $100% of GDP is the end of the line for US borrowing. Perhaps, and I am in this camp, we have already passed the tipping point, we just don't know it yet.

  7. I've got a great idea that I proposed on my blog (http://righteousinvestor.wordpress.com/2011/01/04/memo-to-president-obama-and-chairman-bernanke-a-solution-to-the-budget-deficit/ ), but I doubt president Obama will get it. The Fed just needs to print about 300 billion 100-trillion dollar bills and sell them as souvenir items at $5 each. That would raise 1.5 trillion.

    Keep up the good work!

  8. The federal government has/is making huge mistakes. Most of what they do is getting us into serious economic trouble. However printing money to buy our debt is the least of it. In fact I would advise them to print enough to buy all our debt. We are going to collapse and when we do there will be legal obligations and courts will decide who gets what. If no country/bank/person owned any of our national debt then the courts would not be drawn into it.

  9. How do we get excedent from the original QE?
    Are you assuming that those mbs are actually performing by paying back principal and interest?
    I doubt those mbs and what ever else the fed purchased are actually performing assets. No, what the fed is probably doing is accruing interest and principal payments that should be coming due from these items. Then taking that accrual and purchasing treasuries via QE lite. It truly is just more money printing.

    To the poster above and others regarding the USA national debt, if we subtract out the amount owed to the SS trust fund I believe the national debt is only about $9 trillion, not the $14 trillion so many claim. And Bernank now or soon will own $2 trillion of that amount.

  10. The problem with a pure provided numbers is that it neglects off balance sheet obligations such as Fannie and Freddie for which the US owes. They alone add 4 trillion to the us balance sheet.

    As to any of the major holders of US debt stating that the game is rigged and leaving the damage to their profiles from this statement would be extreme. They have already chosen to leave the market in a serious way and Bernake and QE2 are covering for their absence.

  11. But, nobody seems to have the number. I guess $14T isn't the number, because as I understand it, we just passed that and the stock market is at yearly highs.

    When are you bankrupt? When there is no possible way to pay back your debt. When are you a deadbeat? When you won't pay back your debt.

    When I headed to college, I could do the math: the US was a deadbeat nation. There was no intention of paying off the national debt, or to make good on Social Security or Medicare.

    Now, there's several states who are bankrupt, and the federal government is pretty close if you count Social Security and Medicare as debt (which it legally isn't). We are certainly entirely deadbeat; the only conceivable way to pay it now would be to trash the dollar.

  12. The Fed represents the dollar which represents the global reserve currency. Don't you think some entity by now would've had said enough by now? The fact that no one has drawn a line in the sand by which even the Fed won't cross tells you everything you need to know. This currency can will be kicked so far down the road few will know where it is much less what it looks like. We'll all know what that condition is once it finally stops getting kicked.

  13. Hyperinflation by the end of June 2011 - that is what Martin Armstrong has said too. Also he says to watch the Current Account balance. If it is moving from deficit to surplus it is a big time warning foreign capital is selling and leaving.

    The time to get prepared is now.

  14. Martin Armstrong is scary - in a putting-the-truth-to-lies kind of way. Although many others have hinted/suggested/prognosticated or outright predicted an inflationary spiral, when Martin Armstrong speaks, it can be an unsettlingly refreshing experience.

    Not to get biblical or anything, but our 'cup of iniquity' isn't quite full - yet. The corruption, lies, greed and graft are going to rise to levels that will seem surreal before this all goes down. And that truly is what is so unsettling.

  15. The Fed says: "The Committee intends to purchase a further 600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $ 75 billion per month."

    This has nothing to do with buying over 60% of the 2011 fiscal deficit.

    What the Fed wants is to remove as much as possible longer-term bonds (10 to 30 years) from the market, in order to keep long-term interests low and, supposedly, help the housing market.

    It means that the Fed is not exclusively buying new bonds, but also older one which, for some reason, are sold on the market.

    This is both good and bad for the government.

    It is good because it keeps at a very low level the amount of interest to be paid to debt holders, other than the Fed (short term interest rates are near zero).

    And since these holders are mostly foreigners, little money leaves the country.

    It is bad because, progressively, the debt held by foreigners becomes a short term debt (3 months to 1 year) which has to be rolled over again and again.

    Thus, if these foreigners come to their senses and decide not to cash their maturing bonds, instead of rolling them over, the whole US government financial system will collapse in a matter of a few months.

    Other countries, aware of this risk, have opted for the opposite solution: they sell 100 years bonds. The interest to pay may be higher, but the risk of having to refinance the debt is not for anytime soon.

    Click on my name to visit my blog.

  16. Sorry for the typing error above:

    please read in the second to last paragraph: "...and decide to cash their maturing bonds..."

  17. GL

    You and Jim Rickards have helped me see the light. Dumped all my non insignificant amount of treasuries.

  18. Further the media and the FED are blatantly lying about inflation. Look at this CNN article that uses the slight of hand approach when talking about China's inflation problems.

    Chinese inflation spikes on food costs

    After talking about the dangers China faces with it's inflation it states in the article "Compare that with the United States, where the CPI has been sluggish for months. In October, the U.S. CPI increased a modest 1.2%, according to the Bureau of Labor Statistics. Excluding the volatility of food prices, the U.S. CPI rose 0.6%."

    The article then points to core inflation which Bernanke loves to reference. CORE INFLATION DOES NOT FACTOR FOOD OR FUEL. It even links to an earlier story as proof.

    Inflation at lowest level since 1957

    The chart they reference again points to core inflation. But if you do a little research at http://www.shadowstats.com where John Williams still tracks the stats as they should be counted and compare the different hedonic adjusted measuring methods to the older more accurate measures of inflation you see they are blatantly lying.

    Real inflation is between 8% and 10%.

    In a John's news letter issue number 22, August 21, 2006 he explains Bernanke's lie.

    "Yet, as oil prices began their current uptrend, substitution-based inflation reporting still was not low enough for the former Fed Chairman, as he began embracing the concept of "core" inflation, inflation net of food and energy price changes. Eliminating bothersome price increases in energy and food products -- such as seen with oil at present -- would make the Fed's job of containing reported inflation all the easier."

    They know we're screwed and are cognitively and consciously screwing our country anyways. Who in power has the balls to go get the cuff's and put these bastards in jail? So far no one.

  19. @brunolem you say "This has nothing to do with buying over 60% of the 2011 fiscal deficit." That may be, but in effect it is what they are doing. Bernanke said this wouldn't be inflationary. What a load of bull shit. Interest rates are already near zero, this will effectively cause negative interest rates which is highly inflationary.

    The expansion of the money supply is true inflation and rising prices are a symptom of it. Here is the conundrum, why what a savvy investor park their money in treasuries that don't even yield a positive return keeping pace with inflation? Why would anyone knowingly put their money into a money losing instrument? At some point the dollar dumping is going to commence in a big way when people wake up.

  20. Is this a race between unexpected higher interest rates from inflation, or insolvency because we can't redeem the bonds? Either way its hold your ankles time. Hey how about that subtle commodities move today?

  21. The US will fail in our lifetime. Those that do not think so think that "Dancing with the Stars" and any MTV show is, "like", all that life is, "like", about. There are too many sheeple (unfortunately the majority of Americans). Get ready, it is all going down hill form here....

    1. I have felt for a number of years now that the United States cannot fail until the threat of the mightiest military in the world is no longer credible.

  22. @Anonynous 11.25 PM

    The effect of Bernanke's policies on inflation is difficult to clearly identify.

    When the Fed buys TBs from the government, the money is going to be spend, either directly, or via redistribution to the population.
    Yet, because the general economic environment is deflationary, this injection of money may not create inflation, but just put a brake on deflation.
    This is the same and not the same.
    The best example is housing: houses prices are still overvalued by approximately 20%, "thanks" to Bernanke's policies.
    There is no inflation in the housing market; there is not enough deflation!

    Now, if the Fed buys the TBs from an investor, the latter finds himself with cash which he must park somewhere.
    The risk of inflation depends on where the investor is going to park this money.
    If the money goes in the stock markets, or in gold, this is not inflationist.
    But if it goes in oil, or some other commodities, their price go up and the increase is passed on consumers, thus generating inflation.
    This is actually what is happening in some cases.

    Having said that, the ratio between money creation by the Fed and inflation is far from being 1 to 1, because only a part of this new money ends up in inflation sensitive places.

    As for TBs, I am not sure that any savvy investor is hoarding those worthless papers.

    Only those who HAVE TO own TBs keep on buying: Central Banks from countries with a trade surplus (China, Japan, Saudi...), banks and mutual funds and some other institutions.

    The Daily Reckoning just predicted a bond crash for 2011. They are often right!

    Click on my name to visit my blog.

  23. Good points esp - your summary re bond yields.

    I agree.

  24. GL-I'm o.k. with you using the $1.267 trillion figure. But wouldn't it be wise to estimate actual funding needs, then recalculate the percent monetized? So what if this changes your 'percent monetized' figure from 60% to 50%).

    As you posted, the $1.267 doesn't include the Bush era tax cut extension. Also, I think it would be wise to add a little for increased unemployment benefits, social security tax reductions, off budget Iraq/Afgan war expenditures, etc. Surely you could come up with a reasonable estimate, or quote someone else's.

    If you buy the $1.267 trillion figure as being honest, you would conclude they are making a small, but decent stride toward reducing the deficit from the prior fiscal year, which is of course not the case. -pipe

  25. Historically, money printing today shows up as higher prices two years down the line. It takes that long for newly printed money to make its way into the general economy.

    So I think that there will not be a hyperinflation this year or next, but watch out for 2013 and after.

  26. Education time: 60% of the US budget deficit is NOT "60% of the bond market". The WHOLE budget deficit is some pitiful 1.2 trillions, while the bond market exceeds 82 trillions. A buyer who can control 0.88% of the market can certainly cast noticeable influence on it - but calling it "owns the market" is deeply misleading.

    But don't let the facts stand in the way of good apocalyptic rant. While I must admit that GL's articles have considerable entertaining value, those of you who are reading them for educational purpose will be sorely disappointed.

    Gonzalo, stick with book writing and film making and leave economics to people who have a clue in this matter. (Which, sadly, isn't the mainstream economists, either, sigh...)

  27. Not to dispute your general argument that the Fed is the elephant in the Treasury debt-issuance room, they aren't, based on the numbers you sited, 60% of the market. You need to take the rollover financing requirements into account also, which are probably $2T per year. Based on Fed purchases of $800B to $1T, they would be 25%-30% of required financing needs...

  28. Great article and posts. What is the cost of money to FED? What is the cost of bond issuance to the Gov? Both are very low. The Gov can and does continue to take on more debt. Obviously, many people would be even more irresponsible if they were handed cart-blanche to create money/credit than the Fed has been. Its a tough situation for them now since the Bear (The Gov) demands more money. Suddenly, they have gone from whatever they were to being controlled by the destructive spending of the Gov.
    "while the bond market exceeds 82 trillions"
    82 Trillions? Backed by what assets? Is that a paper trade? Or is it backed by 82 Trillion in real assets. I doubt China, Japan, nor the Investment Banks which own the Fed can assert ownership of the assets of the US Government. So, no, these are not 82 Trillion in assets but simply 82 Trillion NOTIONAL with their ONLY REAL VALUE being the payment stream. You can't make poor people pay their rent and you'll never make broke governments pay their debt. Printing money is the only road to survival for the current government system (Fed/Corporatocract Plotocracy). We can only pray Independence and Democracy will be restored once the Federal Reserve Notes go to naught. Clearly, we have a controlled collapse in Federal Reserve Notes. Has been ongoing for years.
    I think this guy's charts are way better than the nonsense we get from some departments of government: http://opinion.fartoomuch.info/Worth.htm. But I must admit some Fed branches have great charts too.

  29. The WHOLE budget deficit is some pitiful 1.2 trillions, while the bond market exceeds 82 trillions.

    I had a question about this as well. I don't know the exact numbers: Certainly the market for US treasury debt is not $82 trillion; presumably it is about $14 trillion, but at any rate, while The Ben Bernank may not "own" the market for Treasury Debt, he's clearly trying to influence it as much as is politcally feasible, and thus cause it to give signals that it would not naturally give. Perhaps this explains why, with the first inklings of QE2 (the announcement of a huge future Buyer of Size), the bond market rose, and then with the official announcement on Nov 3, in a classic buy the rumor sell the news phenomenon, the bond market tanked. 30yr fixed mortgage rates are running a good 75bps higher today than on Nov 1.

    So does this mean, despite The Bernank's attempts at manipulation, the market will neverthless be the market? Surely it will send false signals from time to time due to the manipulation, but is the medicine, in an otherwise empty medicine cabinet, simply too weak? While I do not look forward to the withdrawal symptoms, the sooner we are over this addiction to free money, the better off we'll all be.

  30. I have felt for a number of years now that the United States cannot fail until the threat of the mightiest military in the world is no longer credible. We may be nakedly insolvent, but the Emperor is still fully clothed as far as the rest of the world is concerned.

  31. "On the other hand, (isn't that how economists talk?) rates went up when the fed said their intention was to make rates go down."

    Simple reason: they LIED! The last QE made rates rise, too, so how could they honestly believe that QE II would lower rates. They are telling the ignorant what they want to hear. What the Fed wants to do is naturally going to cause rates to rise. They don't want that, but that's what happens. Meanwhile, like I said, they tell the ignorant politicians what they want to hear.

  32. I'm not sure what this year's issuance will be, but the last number at this site was 4.4 Trillion in 2006. http://www.sifma.net/story.asp?id=1212
    Even going by those numbers, that's 14% of the market, not 60%.

  33. In our paper today there was an article mentioning the fact that the U.S. debt was about to cross the legal limit of $14.294 trillion. There was the ususal attempts to help the reader understand the enormity of the sum, such as the number of zeros it takes to represent one trillion on paper (12). Then there were several sentences on what was happening in the world on June 1, 2010. The article went on to explain why it was talking about June 1 (which was the question in my mind). Turns out on June 1 the debt was “only” $13 trillion on that date. In other words, there has been an increase of over one trillion in just six months. Just one more brick in the path to the Emerald City that we are all headed for and which, I imagine, is apparent to most readers here. I wonder if it would be of any use to urge that the Fed’s Board of governors read this or any of several other excellent blogs that point out some of these facts. Likely, having let the situation deteriorate to this point, they would not grasp what is obvious to the rest of us.

  34. Here is what I believe is going to happen in the 6 to 36 months. Housing will continue to fall. Jobs will remain at 23% unemployment using the honest pre-1994 measuring stick. True inflation will climb, already it's at 8 to 11%, again the honest pre 1980's rate of inflation before hedonic adjustments, not the lying 2% core inflation Bernanke and the news lies to us with, which excludes food and fuel. The stock market isn't going to realize new highs and since they already laid-off as many as they could to make their books look good and their stocks rise, they won't be able to pull that trick out of the bag again.

    Further the baby boomers that have so much of their retirement wrapped up in mutual funds may well panic when the market starts to drop. Twice as many mutual funds as there are public companies to chase. That may be the cause of the next stock market crash and there will be no dead cat bounce. Then we will see real deflation and Bernanke a student of the great depression will turn on the printing press hard, because the FED can't tax deflation, they have no choice but to print because 53% of our debt is held by foreign interests and they will be expecting their interest payments. Deflation would be an outright default on our treasury debt, so the FED will default on our debt by printing more devalued dollars. This game has been played before hundreds of times throughout history and in every case it ends the same, the currency dies.

    At some point the last straw will be reached and the world will lose faith in the dollar and then all those dollars will come home to roost. Enter hyper-inflation. Not too unlike Weimar Germany between 1919 and 1923, just think of our treasuries as reparations. Fractional reserve banking is going to be severely tested by the retiring baby boomers. It’s not just the US, most countries which fought and suffered large casualties in WWII have the same population demographic problem. We are not going grow our way out of this mess, the math doesn't support it. How do you address paying down $14 trillion when your demographic tax and consumer base is shrinking around much of the world?

    The media glosses over or ignores completely some of the most profound differences between this downturn and the great depression. During the great depression the US was the largest creditor nation in the world, the largest producer and exporter of goods, and we operated on a 40% gold exchange standard. Today all that is reversed. In the 1930’s we didn’t have $14 trillion in debt. We didn’t have $60 trillion in unfunded programs coming due. We also didn’t have the baby boomers in the 1930’s, a now just retiring demographic a full 1/3rd larger than the succeeding Generation-X expected to hold them up.

    If those sterilized dollars in China come home to roost, we will be sitting in the same boat as the Weimar Republic between 1919 and 1923. Bernanke does not have control of the world’s economy; it's just a matter of time before the world ceases to accept our debt instruments in return for hard goods. The US and many countries have two options now, default or restructure their debt.

  35. ***Education time: 60% of the US budget deficit is NOT "60% of the bond market"

    correct! treasury market is 14 trillion ... and that doesn't include exchange or OTC derivatives on the treasury market.

    if you can't distinguish between flow and stock GL, you might want to reappraise not only the colorful language used but also righteousness.

    moreover, the total dollar value or duration in the market is way bigger when you include the mortgage, swap market, ETFs, index products as well as corporate bond market.

    ergo, the fed doesn't control long rates but it does control (the path of) short rates and monetary inflation.

    QE puts off rate hikes indefinitely, and this helps the government issue at lower yields. bloating the Fed's balance sheet further (with suspect crap) makes it questionable as to whether zirp will be ended before most of its mortgage bonds are prepaid or matured.

  36. Does anyone have a realistic plan to deal with this? Escape from US ? To where ?

    Buy land, sustenance farm and wait it out?

    Stock up on commodities that can be traded?

    I don't think the US citizen will be placid. Anyone read Orlov's piece on Siberia?


    And others?

    I'm worried - still undecided on what to do with cash on the sidelines.

  37. The Fed receives T-securities from Congress and credits the U.S.Treasury account for the face value of the securities. Voila !! Fiat money for Congress to spend. The Fed then has the security that it can auction to the Primary Dealers with the help of the Treasury department.

    The entire value of the securities sold at auction is profit for the Fed. That value is not shown on any accounting records. It is touted as going to the government which is a lie.

    QE2 is the OMC purchasing securities that are in the public domain. The practice is further detailed in the following article.


  38. >Does anyone have a realistic plan to deal with this? Escape from US ? To where ?

    Any overwhelmingly majority white country, will be better than the USA, which went from 90% white in 1965, to 65% white today, is making the transition from white country to a colored one.

  39. Anonymous said...

    >Does anyone have a realistic plan to deal with this? Escape from US ? To where ?

    Any overwhelmingly majority white country, will be better than the USA, which went from 90% white in 1965, to 65% white today, is making the transition from white country to a colored one.

    Why bother moving? After a month or so...they'll all be gone...starved. You think anyone will let them leave the cities where they'll be trapped and left to starve? THAT is what the Army/NG will be used for...keeping those fuckers trapped.

  40. I posteed commentary on Gonzo's late Dec blog about the coming complete separation of fokes who think like Gonzo from their wealth. I just wanted to update my position since the fokes who chsed the rally in the gold stocks into the new year have now been painfully eliminated from those trades with nice losses :-) As of right now the PM stocks are actually the one segment of the market that has a "decent" amount of chachingo left in it. I advised to refrain from shorting the PM's until the HUI goldbug index took out the 52 week high. Either today or tomorrow (possibly on fear as the rest of the market begins to collapse) the gold and silver plays will begin the final journey to crash and burn. I'll be back when I feel it is time for the PM's to crash. Things have played out a tad diffrently than I expected as the U.S. dollar has rallied with the markets the past few days. That was unexpected. I still expect the dollar to reach a new 52 week low. For you goldbugs who trade like complete morons...I wouldn't wait for EXK (for example) to trade above $7 dollars before I buy. That's why you just got your ass kicked. You trade like an idiot! :-)

  41. http://news.yahoo.com/s/nm/20110106/ts_nm/us_usa_treasury_debtlimit

  42. "advised to refrain from shorting the PM's until the HUI goldbug index took out the 52 week high."

    A gold guru, you are not. Apparently you have completely missed the monster rally in Venture traded gold micro cap explorers. They are still way above the November high, see stockcharts dot com symbol $cdnx.

    The main gold stock indexes have been underperforming for years. No risk, no reward.

  43. Actually, Pipe, in the period between Aug and Nov 2008 I began accumulating precious metal stocks and owned all of these from within "inches" of the lows >>> PAL, GSS, NXG, KRY, IAG, UXG, TC. I can prove it too...but I won't because there is no reason to. What happened in the past is in the past. I am trying to prepare you for the future so you won't get your ass kicked like the morons who bought any of these stocks going into the new year. I came back this morning to let you "know" there is a trade in em now. Today was a good entry day for several actually. You aren't gonna get any trading advice from Gonzo. He'll just give you the same rheteric that you will get from Peter Schiff or any other clueless goldbug that will tell you that continuous dollar pumpage is inflationary. I say it will not only be deflationary...it'll be necessary, to replace all the dollars that are gonna be lost by fokes who listen to Gonzo and Peter Schiff. Now, relax and "enjoy" the final rally I am bringing you. Can ya handle that, Pipe? :-)

  44. First time I read all these comments. As an investor for the past 40 years which allowed me to retire at age 54 there are a few observations I have:

    1. All the projections, forecasts etc contained in this blog will all turn out wrong to some degree or another. The future in the US is in my humble opinion not forcastable. Too many unknowns. Why? This is a generational situation we are in and all the factors are different from all previous generational situations.

    2. The best we can do is not get hung up with specifics but only in macro trends. Also never let confirmational bias creep into your thinking. This is simply believing something then the only data you pay attention to is that which agrees with your preconcieved notions. So what are the macro things we can reliably observe?
    a. US printing money like no one in the history of mankind.
    b. Very dishonest government at all levels (Romans perhaps qualify here), city, county, state and federal.
    c. Debt to a level never seen before in the history of mankind. OK...Argentina etc qualify as a percentage of GDP.
    d. Very skewed population demographics aka baby boomers who voted (stole) more money from their kids and grandchildren than any generation in the history of mankind
    e. Guns and butter policies at fed level like Lyndon Banes Johnson back in 1967 times at least 100. That resulted in the 1970's inflation and demise of dollar gold linkage courtesy of Richard Nixon in 1972. God knows to what level the consequences are for things this time around.
    f. The most intrusive government north america has ever seen. They will probably get really nasty stealing money from citizens under the guise of many different excuses...national emergency etc.

    So what is a poor US citizen to do? Moving from the country strikes me as the grass is greener on the other side of the fence syndrome. What will happen will be a global phenomenon. Standards of living in the US will dive dramatically. The engine of this will be rising prices without rising wages.

    My only suggestions to survive is to buy tangibles as best you can. I think Jim Rogers is substantially correct with this. Never never let your money be only represented as a computer entry at some financial institution. Most of them are either totally ignorant or completely dishonest. Buy storable food as commerce in the US just might grind to a halt for a period of time. If this happens then social unrest will occur so protect yourself. Present a profile to other people of someone poor and struggling while hiding your wealth whatever level that may be since there will be lots of people worse off than you. Buy a really crappy looking car etc.

    Gold, silver etc should do very well. Don't let any of your assets be someone's else's debt, aka the US dollar. Get out of debt unless you plan to declare bankruptcy with a plan that includes hidden wealth. (This is dishonest however). If you own a home, let the front yard go to hell and don't water it. Your junk car will look good in front of it. Well I think you get my major themes.



  45. "Confusin' but Amusin'." Li'l Abner, ca 1960

  46. Joe: Any overwhelmingly White country? You mean like those European basket-cases where people can't even get bread? Good luck with that. And by the way, don't forget to pay tribute to your new Asian Masters. LOL

  47. GL

    And when the road finally does disappear ... it all comes back to what you said at the beginning -

    "Proof positive that America is indeed a banana republic—only with nukes.
    Gonzalo Lira "

    And that's gonna' scare the he** out of a lot of people around the world.


  48. For me, the big question for the coming decade, if not the next year or two, is whether the U.S. Congress can get its shit together and balance the budget before the U.S. bond market forces the issue via extremely high interest rates and a bond market rout. Politicians don't do anything to jeopardize their status until after the shit hits the fan, so I'm betting on the latter.

  49. "...The Treasury bond market is Bernanke’s bitch. His pimp hand is all over that ho’—..."

    Dont you call my bitch no ho... muddafukka...!


  50. Dear Gonzalo: It's nice to get an independent confirmation of what you are saying. Here's one from the Jan 1, 2011 International Forecaster:

    "The US 7-year auction went well because ‘indirect bidders’ (central banks) bought 64.2% of the notes. Dealers had to warehouse only 31.2%; so a spirited bond market rally appeared after the auction.

    If central banks have to buy almost 2/3 of a US auction, the bond market has a huge problem. But dealers, traders and PMs desperately needed any excuse or sophistry to mark up bonds for yearend."

  51. You don't fix what ails you with more of what ails you.....



    1. You and Jim Rickards have helped me see the light. Dumped all my non insignificant amount of treasuries.

  52. Let’s get to the bottom line here, eh?

    The U.S. government has simply become a collection of poser puppets for the banking family of the Rothschilds. The Rothschilds have been in enslaving the People of the US via the fraudulent criminal conspiracy known as the illegal, unConstitutional Federal Reserve. The entire US government is now simply a puppet of the Rothschild banking dynasty.

    All I want to hear are three magic three letter words,

    “End the Fed”

    Every political candidate must be evaluated based upon this single all telling crucial issue. You are either with the People or you are with the Rothschilds and their agents, the international bankers.

    This is the new American litmus test.


  53. I agree with you that the fed seems to own the market.

  54. "Confusin' but Amusin'." Li'l Abner, ca 1960

  55. Is this a race between unexpected higher interest rates from inflation, or insolvency because we can't redeem the bonds? Either way its hold your ankles time. Hey how about that subtle commodities move today?


Whether you agree with me or not, thank you for your comment.

If you liked what I wrote—or if it at least made you think—don’t be shy about making a payment. The PayPal button is there for your convenience.

If you have a question or a private comment, do feel free to e-mail me at my address expat229@gmail.com.