Dark Skinny

It is certainly true that everyone from the Keynesians, Monetarists and the Austrian Schools of economics all seem to promote the wonders of  Free Markets. These ancient and revered tenets are also widely amplified in the media by the likes of Paul Krugman, Milton Friedman, Larry Summers, Ben Bernanke et al. But, strangely, and from the economic opposition, this very same esteemed principle is urgently and heavily shouted by the likes of Peter Schiff, Jim Rogers, Marc Faber, Joseph Stiglitz, Doug Casey and Congressman Ron Paul. So, I guess something smells fishy in Kansas, something is a bit awry, evidently these free market principles are perhaps being played with and twisted or bluffed for some particular advantage. And when economic principles become thus bastardized, abused and two faced, the common-sense simplicity of economic Free Market principles.becomes lost and wayward  to  simple understanding, wherein government planners and schemers are able to shamelessly steer the markets, and  all trusting citizens are misled and fooled. So, perhaps a proper definition is in order for those of us who are utterly flummoxed. Here are several simple definitions of Free Market:

Definition 1

Business governed by the laws of supply and demand, not restrained by government interference, regulation or subsidy.

Definition 2

A foreign exchange market that is not controlled by the government.

Definition 3

A security with sufficient liquidity that its price is not significantly affected by availability.

When you read these definitions, is it any wonder that ordinary people are so confused with the complex economic activities of the US government? And although the likes of Geithner, Summers and that know-all President Obama resolutely preach Free Market principles out of the left-hand side of their faces — all you have to do is dig down a little into the current stinking US economic septic pit to expose all the dirty, gross market manipulations that have been perpetuated by these paragons of free markets.  If you want to read about this then this link is a good starter. But don't mistake what I'm saying here, the governments of most other developed countries in Europe and elsewhere also manipulate the Free Markets to some much smaller extent. After all, they've had a good teacher haven't they? But, in my opinion, the US government throughout the last century has been The King Daddy of Market Manipulators.

Perhaps, as an American, you might feel that this economic interference and malpractice is OK, –  Hey, what's all the fuss about ? — that's simply the way the economic game is now played, since it 's  all part of the capitalist principle to win economic advantage by any clever and innovative means possible. Perhaps the US government is only trying to help America to lead economically from the front, so all can be forgiven with these manipulations. And maybe this is all true. But there is also a great danger here. America's economic lead is undoubtedly waning and the likes of Russia, China and the other emerging market countries are all playing catch-up with a vengeance now. Soon the global economic baton and lead  may well pass to the likes of China and what then? China has been watching America's economic activities and is now very aware of the American Governments blatant hands-on manipulation of the dollar. So, when China eventually moves to the front of the Global economic pack — as she must through sheer un-leveraged manufacturing productivity and savings — how will America cope? China has been a patient, fast learner. On his last visit to China, Geithner was laughed at, hooted and booed when, during a speech,  he assured the Chinese government that US Treasuries were a safe bet. Well he tried the bluff, but crashed and burned mightily. Fairly clear that the Chinese now fully realize what America is up to, that China must pay heavily  and sacrifice all her savings for America's re-emergence without any other choice. The point here is that political sway and influence relies heavily on the economic performance and riches of any country — this is certainly one form of power — and so if America has been playing The King Daddy of Market Manipulators then what's to stop China or Russia or India or The Middle East — as they eventually overtake America's falling, failing economy — playing by the same dirty manipulative market rules? Will Americans then cry "Foul !!" when China or Russia start to manipulate the markets heavily in their own favor. And maybe Russia and China will then laughingly respond with "Hypocrite!! Hypocrite !!". Who could blame them? The current "rules" of modern economics seem more likely derived from Sun Tzu than they are from the essays and works of Maynard Keynes, Milton Friedman or Ludwig von Mises. Anything goes, it seems.

In the first definition of free markets — defined as markets which are not interfered with, manipulated or subsidized by governments — it is quite evident that the US government(as well as governments in Europe and other developed countries) clearly have not abided by this rule. This simple rule defines that the markets are an economic jungle, and when left alone as they should be,  if any business or stock doesn't perform, then that business is inefficient, uncompetitive, non-productive, over-leveraged  or corrupt and rightly deserves to die. So, according to the Darwinian free market principles, only the strongest and best performing businesses should survive. But what have we got instead? In a word — Bailout after bailout. The US Government is not only rescuing Wall Street and huge corporations, the Fed is also buying up all their dirty toxic assets as well !! In effect, the US government now clearly supports all the corrupt, fraudulent, insolvent and too-big-to-fall business institutions of America which is quite the opposite of Free Market principles.

As further evidence of  US Government market manipulations — all you have to do is take a peek at the recent performance of commodities like oil, gold, soyabeans and wheat. I won't spend time on more evidence, there's too much evidence really. But I will describe how it is done.

From my readings the US FED is supposedly responsible for the maintenance and regulation of US banks, price stability, inflation and the US money supply. Little known is how the FED maintains the strength of the US Dollar. The FED maintains the US dollar, not only by suppressing interest rates,  but  by entering into large currency swap arrangements via the Federal Open Market Committee. This Committee is allowed to interfere and play the currency exchange markets as much as they like to maintain the strength of the dollar. And, according to the second definition of Free Markets — A foreign exchange market that is not controlled by the government — again, this FOMC activity directly offends and contradicts the definition of  "Free Markets" doesn't it ?  

There is also a very little known arm of the US Treasury called the Exchange Stabilization Fund(ESF), which discreetly though massively manipulates the US stock markets by their very secretive and hard-working Plunge Protection Team(PPT). Recent activities of the ESF seem to be concerned with dollar price stabilization via direct gold manipulation in the commodities market. From the Market Skeptics site:

Originally funded out of the profits from the 1934 gold confiscation, the little known ESF is available for intervention in the foreign exchange markets. In the absence of a Congressional appropriation, the Clinton administration used funds from the ESF to finance the 1995 U.S. bailout of Mexico. However, accepting the Greenspan dictum that it "would be wholly inappropriate" for the Fed ever to intervene in the gold market to manipulate the price, it is hard to imagine any situation in which such intervention would be appropriate by the ESF, never mind one involving large profits for the former investment bank of the Secretary himself.

Last week, in response to an inquiry from Bridge News, Secretary Summers "categorically denied" that the Treasury was selling gold. With all due respect to the Secretary, this is not the allegation that knowledgeable gold market participants and observers are making. Their allegation is that the ESF — by writing gold call options or otherwise — is making sufficient gold cover available to certain bullion banks to allow them safely to take large short positions in gold, thereby putting downward pressure on the price and in the process making huge profits for themselves.

So, how does the ESF manipulate the free markets, what is its modus operandi ?
From an interview in the Americans for a Free Republic website:

The PPT [Plunge Protection Team] operation has access to unlimited funds because it was formed by the Treasury which can create money out of thin air. My guess is that the organization is structured through an offshore hedge fund established by the ESF as a front group. They do their buying and selling from perhaps the Bahamas or the Cayman Islands. One thing we know is that they place their orders through several of the big brokerages in New York such as Goldman Sachs, JP Morgan, or Merrill Lynch. This way no one at the brokerage houses or on the exchange floors actually sees any massive buy orders from Washington bureaucracies.

The way they work the scheme is whenever the market is going too low and threatening to crash, the PPT initiates buy programs on margin for S&P futures contracts in large enough volume to check the market fall and panic short sellers into covering their short positions. This creates a "short squeeze" and explodes prices upward. Hedge funds and institutional buyers then rush into the market to buy in order to catch the rally. This extends the rally and effectively ends the potential market crash as investor mood shifts from bearish to bullish. The rally is created in the way that lighting a match to kindling ignites a roaring fire. The S&P futures contracts are so highly leveraged that a $200 million buy can be initiated for $10 million in the PPT account with JP Morgan. A $500 million buy can be initiated for $25 million. These margins are chump change for the Treasury-ESF-PPT operatives. As the rally proceeds, the PPT then sells their contracts back to the hedge funds and institutional buyers that follow after them. The PPT then goes to the sidelines to await the next crisis when they will need to stem a potential crash.

Is this not also outright market interference and manipulation? This makes me laugh very sarcastically concerning one of President Obama's past stated policy dictums. Early on in his reign,  when Obama first came  to power — he made much rhetorical sound and thunder concerning  sterner rules, regs and transparency regarding offshore bank accounts and businesses in places such as the Cayman Islands. Can anyone now see  that this was all BS — because without these non-transparent offshore accounts and businesses the ESF simply could not function or do its covert job. So, folks, anyone with an offshore account will be safe enough in the future. This empty and hollow promise by Obama seems to be just one more ineffective and deliberate distraction for his people.

So, please, let's not have anymore babble about how we have Free Markets.  We haven't had Free Markets in over a century and they will never return. But I will give you a new economic rule:

The Free Market principles are dead. But whichever country is at the top of the global economic pyramid will always endeavour to control and manipulate the global markets without fail — in any  dark, selfish and illicit manner they choose. Sadly, this rule seems already to be the accepted economic norm. And, like it or not, global leadership always changes according to economic circumstance because the Global Markets will forever remain a black, complex and unpredictable jungle and  one that is still very capable of teaching harsh lessons against the greater follies of both stupidity and greed versus risk.

And so it goes on, through all this continual massive government market interference, with all the usual   stupidity, folly or greed,  such that with this greater risk  and leverage comes  a much deeper decent into the economic abyss. In truth, The Markets can certainly be manipulated but their final timing and outcome can never be accurately predicted. This is how lessons are learned,  from the simple failed investor to the massive slide into Hell of a complete economy.

Such is the timeless  nature and behaviour of The Markets which, even though economically bound and manipulated like a great tiger,  are still able to behave remarkably freely and so unpredictably. Somehow, even with all this manipulation, the US government still manages to screw up the markets regularly. After all, that most illusive of all predictables — Market Confidence — is surely derived from nothing more than human action and human behaviour.

And there is no accurate economic or mathematical model for that one. Right ?

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Other References:

The Exchange Stabilization Fund

The Exchange Stabilization Fund: Slush Money or War Chest ?

There is an interesting comparison and difference that exists between US State fiscal policies and US Government fiscal policy. All States like California are unable to whimsically print mountains of US dollars to solve their monetary deficit problems as is the peculiar habit of the US FED. The use of this easy monetary tool to endlessly print paper money is against the law for all US States. Also most peculiar is The Administration's tendency to give all its United States squat in real fiscal aid. It seems that President Obama, in all his very limited wisdom, prefers only  to help  Wall St. and large too-big-to-fail institutions or corporations using "trickle down" economics (whatever the hell that is) with unending bailout after bailout, purchasing all those billions of  rancid toxic assets, expensively expanding inefficient government and deficits  exponentially with rash  Medicare and adhoc infrastructure projects. All the US States are badly strapped for cash now, and the US government simply isn't helping them. So, even though President Obama may well keep his promise and not increase federal taxes against his beloved citizens, State government most certainly will and, through the urgent necessity of actually needing to balance individual State deficits and accounts,  these State taxes could be very harsh indeed on US citizens. But this seems to be Obama's strategy, a somewhat devious strategy it seems to me,  that so conveniently avoids all  the blame for the coming inevitable and heavy State taxation. What we appear to have here is Obama's administration totally focused only on saving Wall Street and big business corporations, while the responsibility of running the rest of America has fallen very  ungracefully into the laps of bewildered State governments.

Here are some surprising facts and figures about one state — California — a State that was truly envied in the past, a region where everyone once scrambled to live the good life and which was once one of the richest States in The Union. Not now though, and perhaps California together with all the other US States currently in budget Hell, are simply an economic mirror for what is later to come for all unsuspecting Mainstreet Americans.

From USA News

1. California's economy is larger than that of many countries, including Canada and Brazil.

2. The state's deficit is estimated at $24 billion for the fiscal year that begins July 1.

3. Gov. Arnold Schwarzenegger's budget proposes slashing health and welfare spending by 26.5 percent and closing 80 percent of state parks.

4. To cut the deficit, Schwarzenegger has stated that he would eliminate the state's basic welfare program, which serves 1.3 million residents.

5. Democrats are seeking alternatives to major cuts, such as rescinding $1 billion in corporate tax breaks, enacting a 10 percent tax on oil pumped in California, and tapping into a $4.5 billion rainy-day fund.

6. Californians pay the second-highest sales tax in the nation; the state's gas tax is the third-highest in the nation; and California's  top earners have the second-highest state income tax rate in the country.

7. California residents with incomes of more than $500,000 pay nearly 40 percent of the state's personal income tax revenue.

8. A state ballot initiative approved by voters in 1978 limits property tax rates, the primary source of revenue for school districts and local governments, to 1 percent.

9. California has the highest research and development tax credit in the country, which will cost the state $1.2 billion in potential tax revenue this year.

10. State officials have said that California will run out of cash by the end of July. Schwarzenegger sought a $6 billion loan guarantee from the federal government, but his request was denied.

From The Congressional Budget Office - The Long-Term Budget Outlook

Executive Summary
As health care costs continue to grow faster than the economy and the baby-boom generation nears eligibility for Social Security and Medicare, the United States faces inevitable decisions about the fundamentals of its tax and spending policies. This Congressional Budget Office report looks at a range of possible paths for federal spending and revenues over the next 50 years and combines them into various hypothetical scenarios. Analysis of those scenarios suggests the following conclusions:

• Driven by rising health care costs and an aging population, spending on entitlement programs–especially Medicare, Medicaid, and Social Security–will claim a sharply increasing share of the nation's economic output over the coming decades.

• Unless taxation reaches levels that are unprecedented in the United States, current spending policies will probably be financially unsustainable over the next 50 years. An ever-growing burden of federal debt held by the public would have a corrosive and potentially contractionary effect on the economy.

• As the U.S. tax system is currently configured, revenues will increase as a share of gross domestic product. Under current law, taxpayers will face higher rates, with detrimental consequences for work, saving, and economic growth.

• Fiscal policy could be financially sustainable if the growth of health care costs slowed significantly from historical rates. But even in those circumstances, tax revenues would probably need to be higher than they have been in the past.

• If taxation is restricted to the levels that prevailed in the past, the growth of entitlement spending will have to be substantially reduced. Restricting the growth of outlays for defense, education, transportation, and other discretionary programs would not be enough to ensure fiscal sustainability.

• Likewise, economic growth alone is unlikely to bring the nation's long-term fiscal position into balance. Moreover, issuing ever-larger amounts of debt or dramatically raising tax rates could significantly reduce growth.

"Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds longterm fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt. Keeping deficits and debt from reaching levels that would cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two."

Other References :

• CBO Paints Dire Portrait of Long-Term Revenue Spending –Washington Post

• US on "Unsustainable" Budget Path — CBO says -  MarketWatch

• Budget office: Deficits must be slashed — The Hill

• CBO - The Long-Term Budget Outlook, June 2009 — beSpecific
  

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The Green Energy Revolution or just more painful Economic Bilge ?

With his recent trip to China over with, Geithner appears to have unflinchingly declared his policy hand. With one side of his face to the Chinese he said "Your Treasury assets are safe…" but with the other side of his face –  he declares that the American economy is improving. You gottta hand it to the man, and all this with a straight face too. No wonder the Chinese laughed at him.

Earlier this week, two Japanese gents were stopped at the Italian Swiss border town of Chiasso. Their baggage was searched, and the border guards found $135 billion worth of US Treasury notes hidden in their suitcases. The only thing left to determine is if these US Treasuries are counterfeit or not. And since nobody in their right minds would go to all that trouble to counterfeit large-denomination US Treasury notes and since it is not possible for any corporation or individual to own or hold  such a huge quantity of US Treasuries, there can only be one explanation — governments are involved. Could it be that Japan is desperately trying to offload her useless stash of  US Treasuries by any means possible? Looks like the Chinese aren't the only one's who are laughing at Geithner in disbelief.

If it's a case of helping the Chinese or helping the US economy, I'm pretty sure now that Geithner will side and do all he can to save the US economy. But I wouldn't be too happy here as an ordinary American citizen. After all — I said Geithner wanted to save the American economy — read Wall Street, big corporations etc. To be clear, I never said that Geithner has any intention of helping Mainstreet. Clearly — from the article below — Geithner has evidently made his decision — he is happy to sacrifice the dollar for the US economy. And the dollar decline is happening right now, plain as day.

From Orange County News
Author: John Tamny

Though the U.S. press mostly withheld mention of it last week, the international media had a big laugh over Treasury Secretary Geithner's visit to China. Apparently more aware of the dollar's withering condition than our chief dollar steward – a scary thought on its face – they clearly understood the audience laughter when Geithner told Chinese students that dollar–denominated "Chinese assets are very safe."

It doesn't take an in-over-his-head Treasury secretary to understand that when the dollar is falling, the assets that pay out those dollars are necessarily imperiled. The Chinese, and all holders of U.S. Treasuries are necessarily skeptical, and with good reason. Whereas a dollar bought 1/250th of an ounce of gold in 2001, as of this writing it only buys 1/960th. Despite this stupendous collapse in the unit of account, Geithner remarkably believes that our federal debt is a good bet.

For this alone, it's hard to be optimistic about the dollar's prospects. When Treasury heads exhibit total ignorance about its value, and in Geithner's case a sanguine countenance, this is a signal that the greenback is being ignored and that further weakness will be accepted.

Worse if that's possible is Geithner's stance on the very inflation that the above dollar weakness represents. As he told U.S. reporters last week, the Chinese "understand and have confidence in the Fed's capacity to keep inflation low and stable over time." Implicit in a statement pregnant with meaning is that Geithner shares the Fed's absurd view that inflation is an economic growth concept that can be controlled through interest-rate machinations that supposedly fine-tune economic activity.

What this means is that true inflation, something that is always and everywhere the result of declining currency values, will be ignored in favor central management over the economy. That economic growth of any kind has nothing to do with inflation doesn't seem to trouble our Treasury secretary. Instead, he'll apparently accept the dollar's inflationary decline while allowing the Fed to make interest rate guesses that frequently end in tears. Is it any wonder that investors are growing increasingly skeptical about our private capacity to support the debt issued by Washington?

Rising Treasury rates suggest investors are growing very skeptical, and further statements by Geithner offer clues as to why. Sure enough, he mimicked his Treasury predecessors in the Bush administration with his comment that "We … welcome their commitment over time to move to a more flexible, market-determined exchange rate."

Translated, Geithner underscored his untroubled conscience about the dollar's decline with his statement about flexible exchange rates. What he actually meant was that China's manipulation of the yuan doesn't bother him so long as its value increases relative to the dollar. The Chinese currency can rise versus the dollar either through a strengthened yuan, or, and this is more likely the case, thanks to an even more debased dollar. In short, Geithner talks about sound U.S. assets out of one side of the mouth, and then out of the other he accepts further dollar decline that will necessarily make them less valuable.

More broadly for the economy, his currency stance points to a stagnant one. That's the case because inflation invariably fosters an investment climate whereby capital moves away from the growth and wage economy, and into hard assets that by their nature can't make us more productive. To expand, businesses need capital, but Geithner's "benign neglect" of the dollar means that investors will seek safe haven from concepts whose returns will be eroded by inflation.

Concerning his view that the yuan should float against the dollar rather than be pegged to it, it's best to conduct a thought experiment: Do individuals in California engage in more or less in the way of wealth-enhancing trade with Arizonans thanks to the dollar being the lone currency in both states? If the answer is more, and that's really the only answer, we must then ask how trade between Tucson and Torrance is any different than trade between San Francisco and Shanghai. It is not.

That the dollar is the only currency within our 50 states logically insures more trade because a single currency greatly reduces the very currency risk that makes transacting across borders so difficult to begin with. The reality is that ever since China pegged its currency to the dollar in 1994, trade between individuals in the two countries has skyrocketed. This has of course accrued to the economic health of both countries in that workers in each have been able to specialize their labor. Absent this tight currency arrangement, it's a near certainty that some transactions will never be, and the comparative advantage that lifts all economic boats will be compromised.

Perhaps silliest of all, Geithner made plain his desire that the Chinese "strengthen domestic demand" in order to stabilize the international financial system. He got it exactly wrong. Production itself is demand, and even if the Chinese choose to bank their monetary gains rather than spend them, the money saved will be lent out to others (including capital-starved U.S. firms) who will demand what Chinese citizens presently do not. In the end entrepreneurs can't be entrepreneurs without capital, and Geithner's policies applied ensure that there will be less capital available for those eager to innovate.

It's likely a testament to the world's overall economic health that at least for now, foreigners and Americans alike can laugh at the musings of a Treasury secretary who's so clearly not up to the job. The problem here is that the dollar remains the most important price in the world, and its decline is no laughing matter. Tim Geithner surely ignores its falling value to the detriment of the world economy, and if his indifference continues, we'll soon enough not be laughing.

The video below is sure to astonish and amuse. In this recent video, the Inspector General of the FED — Elizabeth Coleman — is grilled by a Congressional Committee, questioned so patiently by Congressman Alan Grayson. The answers are few — only excuses, if anything at all, are subtended by the Inspector General. Coleman avoids giving even one complete answer to any of Grayson's questions. Most who have seen this video are saying that the Inspector General is an idiot who knows nothing of FED activities. But I think we knows better. With a security rating that is higher than the CIA, the FED's Inspector General knows exactly what she is doing (Watch for the woman behind Ms Coleman who so studiously and confidently advises her — obviously a FED lawyer). The Inspector General is fully aware that she doesn't have to tell any US government committee anything because the FED is protected — by US Law — against any openness, accountability or transparency. There is no better illustrative evidence concerning the power of the FED — where any checks, balances and oversight on their activities are not allowed. They can do what they like by telling any questioning Congressional or Senate Committee to go jump — with complete immunity and impunity.

Is Anyone Minding the Store at the Fed?