As whispers became shrill rumors of a Greek default last week, it became clear that the Federal Reserve was going to “inject liquidity” into the French banks that could not find overnight funds on the open market.
Markets are disciplined. The Federal Reserve magic money machine is not. When the market decided the three French banks were over-extended in Greece, and loaning them money was a risk not worth taking, the Fed and other central banks stepped in, with fresh, new magic money, to take risks the market was not willing to take.
The French, meanwhile, were protesting that they did what all the global finance geniuses wanted them to do, loan give the Greeks money.
But the fiscal mirage of Greek economic growth with draconian cuts, and accurate financials all came crashing down when the Greek financials and estimates of growth turned out to be written by Madam Zorba, the gypsy fortune-teller.
Then the market really puckered up, with no love cash for the French.
And all the banks that were in too deep in the blue end of the Mediterranean cajoled, begged, yelled and otherwise described the end of planet earth as they knew it, if the Federal Reserve did not magically and electronically — tout de suite — create some money out of thin air and send it over, now.
To make magic money, the Federal Reserve calls the CFO of the French bank it’s attempting to save, and asks the CFO to open up the special access compartment in their banking software that allows new money to be typed into their reserves. The Fed tells them how much to type in, and presto, any given amount, say 60 billion in U.S. dollars is created by a phone call and a keyboard.
But it’s a little more creative than just typing in the money — sometimes the bank is asked to buy Treasury bills through an approved third party dealer, at the next auction of U.S. Treasuries, using the magic money they just created.
The bank then uses the newly created “money” to buy the U.S. T-bills in the amount of the money the Federal Reserve said they could type into their balance sheet. The bank sends the just-typed-in “money” to the Federal Reserve, and the Federal Reserve sends newly printed bonds.
The U.S. Treasury then can spend that new money on “the One’s” failed stimulus and the job-killing ObamaCare, for example.
When the Federal Reserve decides to give Madame Zorba a real run for her creativity, the Fed announces it’s going to “buy” those T-Bills back and simply types the amount of the bonds into their computer, creating more cash, sends the magic-money to the French, (who now have cash to lend outright, instead of using the bonds as an asset, to lend money). The French then send the T-bills back to the Fed.
Great trick (it has many variations).
The price of the magic money is that the U.S. dollar loses its value — 20 percent of late. Plus, as an added disincentive, since more money is chasing the same goods, inflation rises.
Essentially, the average American pays the price for the Federal Reserve’s money printing by devalued currency and inflation, so does any other nation who holds U.S. dollars. Everyone with greenbacks loses.
But this is to save the world, remember? Who could be against giving Madame Zorba and the Greeks more cash, or the French, right?
Eventually Americans will get the joke being played on them by people who insist they and they alone know best, and that there should be no oversight of their privilege to type in money.
They are on a mission from God. They really think they are saving the world.
The fact that Congress and “the One” can’t stop spending has convinced many T-bill buyers the U.S. dollar value is not coming back – see the recent S&P downgrade.
To wit, after the massive battle over the “debt ceiling,” politicians bowed uttering solemn chants with blood oaths to cutting spending.
That lasted until August ended, just one month.
Then “the One” when on international television and did his half-Maxine. (Maxine Waters asked “the One” to spend a trillion dollars on jobs — so “the One” went with roughly half that — thus, the half-Maxine.)
Meanwhile, Bloomberg publishes a piece (prior to the half-Maxine) attempting to point out that the Congressional Budget Office (CBO) has this neat calculation called the “fiscal gap.” It’s a tool to determine just how upside down the U.S. government is — the CBO runs all known revenues and all known payments out over decades.
The U.S. fiscal gap is negative $211 trillion.
The Chinese, and the rest of the world are beginning to clue in, including Joe-six-pack, who are painfully becoming aware that every time the Fed creates hundreds of billions via their keyboard, the value of the dollar drops.
So, looking to park their earnings in something that maintains its value better than the currencies of countries that spend too much, won’t stop spending, or like “the One” simply will not stop spending, the Chinese recently announced they were going to put their earnings into Western companies, land, factories — real stuff — not Western currencies.
When Italy asked for a bailout, er loan from the Chinese two days ago, the Chinese said if you let us join the World Trade Organization, if you cut your spending — we will give you money, not for bonds or debt, but only if you let us own nice big slices of your best Italian companies. As of this writing, the Italians are quietly mumbling in their lattes. (Can you see the U.S. future?)
Thus, the Fed magic money combined with the trillion dollar President and his half-Maxine will similarly force those with savings to dump their dollars into something else — soon. (Do you remember when commercials to buy gold were only on at 1 AM, but now are playing in prime time? Oh, that.)
Meanwhile, the stock market goes up whenever the Fed goes on a hundreds of billions in newly typed in dollar creation high — to save the Greeks and the French.
Then the market goes down, since drug addicts need higher and higher amounts, more often because drug addicts build up a resistance. Ultimately, every addict crashes, but first comes the erratic behavior — lots of violent ups and downs. Sound familiar?
Interestingly, the Federal Reserve has two mandates: keep the U.S. dollar strong and unemployment low.
The FAIL by the Fed on both points has already hurt it politically.
The who-us?-we’re-just-over-here-creating-hundreds-of-billions-in-typed-in-dollars — will not fly for much longer.
The French and everyone else have already lost 60% of what they loaned to the Greeks. The market is pricing Greek debt at 40 cents on the dollar — so our printed cash is really just bailing out the French for their losses.
Once the American public finds out — the political blow-back for the Fed could permanently maim it.
What will happen to the Fed will make Governor Perry and Rep. Paul seem moderate.
Now, Gov. Romney can hide his head in the see of freshly printed T-Bills, but it will not help. Since the Fed can’t and will not stop — the force of markets and nature will stop the Fed. It has already started. The unemployment, inflation increases and dollar devaluation are sure signs. (Politically, see, for the first time ever, a consensus that their is serious concern about the Fed and an unraveling of any consensus about its mission. A very far cry from it being untouchable.)
During record debts, record spending, record unemployment, record losses in the housing market, the U.S. is debasing its currency by magically creating money to bail out foreigners who lent to the Greeks? Yes. And it will not go over well with the voters. Every single federal elected official understands the word bailout — and getting pinned with it publicly is the political equivalent of the mutant bird flu from the movie Contagion.
Let’s see, can you imagine the words bailout, the Fed and the French in a 30 second TV commercial this election cycle?
There is just one other thing. How do you sell bonds when the buyer knows your currency will be worth less in the future and the seller does not allow a higher interest rate to provide a return that exceeds the devaluation?
Perhaps, you use magic money — give it to the buyer so that interest rates can remain flat?
Are we all Madame Zorba now?
At what point does the American public start acting as if their own currency and loans are all fiction, since they are learning from the masters, and what will that mean for these financial geniuses who are destroying our country, in the name of saving it, one keystroke at a time?