by John Galt
July 17, 2013 22:30 ET
There is this persistent myth permeated by the mainstream media, politicians, financial cable television, and worst of all the banking community that the current levels of “Quantitative Easing” (QE) initiated by the Federal Reserve Bank of the United States is only $85 billion per month. That would be amusing if it were true. The United States surrendered control of the printing presses in 1913 and after a 97% depreciation of the currency, this final Ponzi scheme initiated to protect the economic system that the central bank designed for their profit and pilfering continues as America slumbers through sub par economic expansion if not outright real contraction.
Before I take a moment to explain how the purported QE is far in excess of what the propaganda promotes, I shall provide some logical background using history and the Fed’s own charts to illustrate the folly the Fed is engaged in. Interestingly enough, after eradicating the tracking of M3 to measure the expansion of the monetary stock, more charts were recently discontinued which helped to provide a picture of just what was happening with the explosion of the monetary base and where the Fed’s institutions were keeping their “cash” deposits and investments.
The total Federal Reserve Board of Governors Monetary Base Adjusted for changes in Reserve Requirements was discontinued in May of this year but reflected a horrific reality that the political elites and financial media refuses to cover:
That it is moving off of the charts at an exponential rate in just six plus years.
The last five readings until it was discontinue also demonstrates the insane rate of expansion (millions of dollars):
When compared with the latest reading of the Total Monetary Base, which in June was at $3.201 billion and rising, it adds to the perspective:
So just where is all of this money going if very little of it is filtering down to Main Street, USA? Part of it is placed on deposit with the Federal Reserve paying a very minimal but profitable rate compared to what an individual is paid by the very same banks for savings accounts. Despite popular belief reported on by the financial press, the banks do indeed have more than enough money on hand to expand credit and provide liquidity to small businesses.
The chart for Excess Reserves of Depository Institutions which was also discontinued in May of this year shows that in fact the banks could indeed pay their customers more for savings but unfortunately, laundering it for their own profits instead of investing in the American economy is much more important:
If anyone hasn’t figured out yet where the money is going, the following chart comparing the M2 Monetary Stock to the S&P 500 should provide a clue:
The circled areas indicate where the financial system was experiencing difficulties and instead of allowing the banks to suffer the economic correction to complete as reflected by equity price declines, the Federal Reserve injected more liquidity into the market and further expanded the amount of money in the system. But just giving a measly $85 billion per month does nothing to resolve the necessary deleveraging of trillions of dollars of bad securities floating around the world, thus a reminder on how Fractional Reserve Banking works in the United States is in order.
Murrary Rothbard, one of America’s most famous Austrian school economists, once explained the key aspect to our banking system in an article on the subject (reprinted by Lew Rockwell) from The Freeman in 1995:
Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term “fractional-reserve banking,” which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem. (Right now, in the United States, this minimum fraction is fixed by the Federal Reserve System at 10 percent.)
Think about that statement as to how banks operate; if a bank receives a $10 deposit from my reader, theoretically it could loan out $100 in electronic money or via a paper note without printing a dime. Think about what they could do with $85 billion then if at a minimal fractional reserve ration of 10:1 exists (it is much higher now). The crude flowchart I have constructed below gives my reader some idea as to what is happening with that money and how the leverage created has expanded the monetary base without creating inflation in the “traditional” sense of the word, yet increased risk to new extremes.
Now it is time to try to explain this mess in some understandable terms without introducing the globalist banking system into the equation; not to mention it made the chart entirely too large to fit on this page with any degree of reasonable comprehension.
When the Fed introduces a bond purchase, those purchases are not just from the government as illustrated in this excerpt from the January 24, 2012 2 year auction where the Fed purchased $658 million using their SOMA (System Open Market Account):
However, one needs to remember who and what the Federal Reserve consists of; it is not the Presidents of the various branches nor just Ben Bernanke. They are simply acting on behalf of the very same direct bidders (see above) who are both Primary Dealers and shareholders of the bank. The Federal Reserve is a private company where shares are held by the very same banking institutions the Fed buys bonds from. So when one hears the panic stricken hysteria about “Oh my God, they are buying $85 billion per month in bonds and monetizing the debt,” that is true only to some degree. A new formula to prevent that cash from reaching Main Street by and large, has been created; not to expand the economy but to protect the very existence of the Federal Reserve and other central banks throughout the world. By buying bonds from the very institutions which own the Fed and then giving them more cash to “deleverage” or dump their bad holdings and gambles from 1994 to 2007, the system is simple creating a taxpayer guaranteed side of the equation to prevent the hundreds of trillions of dollars in derivatives from unwinding or collapsing as they were in 2008-2009.
Thus when one of the member banks sells the “Fed” (in other words, to themselves) say, $2 billion in MBS or Treasuries, they can loan out or create $20 billion or more based on today’s leverage requirements. It explains the huge profits on little investment activity from the average investor plus hedge funds which do not participate within their umbrella, but the why is much, much more important.
Follow the flowchart in this manner:
1. Member bank/Shareholder/Primary Dealer (hereafter referred to as “Shareholder”), all one and the same, buys U.S. Government issued debt, either from the Treasury or the Agencies like Sallie Mae, Freddie Mac, Fannie Mae, etc.
2. Shareholder sells bonds back to themselves via the Fed where electronic money is created and funneled back into the account at par plus 0.10% or a similar rate.
3. Derivatives based on those instruments are created along with securities (MBS, etc.) for sale to banks, hedge funds, other investors.
4. Shareholder takes cash from bond sale to the Fed, loans it to an affiliated hedge fund (Example: Shareholder Bank of the Cayman Islands Hedge Fund No. 203) at a short term rate based on the Federal Reserve discount rate +0.25%. Affiliated hedge fund then buys derivative, MBS, or other security from parent company and creates further derivatives plus sells Credit Default Swaps as insurance against default from the loans contained within its purchase from the Shareholder.
5. Hedge fund sells instrument and derivatives to raise cash to pay Shareholder loan.
6. Hedge fund holds other instruments that are of such poor credit quality to maturity; if defaults cause severe deterioration in quality, hedge fund is closed and assets liquidated to pay deficits on loans from Shareholder parent.
7. If Hedge Fund default impacts Shareholder bottom line, CDS or other insurance pays off; if that fails to settle outstanding total, then the Shareholder is allowed to take a tax free exemption on a capital loss for that overseas corporation.
8. The investments that Hedge Fund makes into other instruments (CDS, Options, Equities, etc.) are used to manipulate various markets to ensure that Shareholder profits from other market investments to guarantee daily cash flow/profit to parent institutions and the Federal Reserve members.
Confused yet? That is the purpose of moving funds seven plus directions at once, to not only keep the average citizen from comprehending this mess, but regulators, etc. The real purpose of creating $85 billion in QE then leveraging that up to $850 billion is not to expand nor maintain the U.S. economy as purported in the public statements; it is to eradicate all of the evidence and bad investments created over the past 10-15 years while providing the illusion of prosperity.
If anyone thinks the large domestic institutions are loaning money out to business, this chart of Total Value of Loans for All Commercial and Industrial Loans by Large Domestic Banks demonstrates that since the 2000 .com collapse a massive contraction in loans has been underway:
Thus the mythical expansion is only a minor blip in the long term perspective of the hundreds of billions of dollars created by the Fed and its own banks to erase the evidence of the fiat Ponzi scheme they created at the turn of the century. By moving the paper offshore and selling it to suckers in state/municipal pension programs (guaranteed by US Taxpayers), foreign sovereign wealth funds (guaranteed by US Taxpayers), and their own mutual funds, etc.(now guaranteed by the US Taxpayers under Dodd-Frank) the banks which own the Fed are able to create paper profits while never passing the trillions of dollars created through to the street level economy to initiate the long feared hyperinflation. Unfortunately, as nations start to flounder economically a greater threat will return to our shores and that will be the next portion of the story.
In the mean time, understand that my readers, those American taxpayers are the ultimate insurance policy against another failure. No matter how many billions of dollars in Mortgage Backed Securities the Fed claims to have “purchased” from overseas entities or elsewhere;
…The truth is that the American taxpayer via the government is the ultimate guarantor of repayment either via the very property we perceive to own our our own labor and sweat. As the system enters the secondary phase of default, contraction, deflation, and depression, the Fed will be forced to release the pressure valves and force the trillions of dollars created off its books and on to the streets of the average citizen’s economic reality. That moment will truly be America’s day of reckoning and the event which will force a massive reset in not just our quasi-capitalist economic system, but how our government operates within the world of finance, as it now exists as only a subsidiary of the Federal Reserve member banks at this moment in history.