Great Depression Online Archive Issue:

Caught Red Handed

Great Depression Online
Long Beach, CA
February 16, 2010

Inside This Issue You Will Discover…

*** The Mop Up Phase
*** Tying Us All In Knots
*** Caught Red Handed
*** And More

“If you don’t know where you are going, you might wind up someplace else.” – Yogi Berra

The Mop Up Phase

We now may be entering into what, in central bank parlance, is known as the mop up phase of the operation.  This is where Ben Bernanke and his cohorts at the Federal Reserve mop up the funny money they created by contracting the money supply. 

It’s a delicate situation, no doubt.  If they pause a moment too long, inflation could flare up like a California wildfire.  Yet if they act too soon, or too strong, the economy could sink back into the abyss.

How to go about withdrawing $1 trillion from the financial system without disrupting the economy is Bernanke’s big dilemma.  It’s an interesting conundrum…if only the stakes weren’t so severe.

~~~~~~What Is Going On?~~~~~~

On September 22, 2008, Lehman Brothers, the world’s largest bank, announced its insolvency.  Within minutes, the stock market plunged to historic depths, terrifying investors and individuals the world over.

Lehman Brothers was not the first (remember Enron?), nor would it be the last. Soon there was a long line of banks, insurance agencies, corporations, and other institutions running to Washington, D.C., with their hands stretched out, grasping to be part of the “bail out.”

A pitiful and disgraceful display of dishonesty, greed, and deceit.

What is going on in our world today?

~~~~~~~~~~~~~~~~~~~~~~~~~

The economy is expanding, remember.  GDP is up two quarters in a row, if you believe the official numbers.  Technically, the recession is over.  Of course, here at the GDO we believe the recession is over because it is not a recession at all; it’s a depression.  Most just don’t know it yet.

But if you go by the official numbers, and thus the recession is over, Bernanke must now unwind the Fed’s accommodative policy.

Tying Us All In Knots

Last Thursday Professor Jeremy Siegel came out with an article titled The Fed Must Use Its New Policy Tool Soon.  In it he details the latest gimmick Bernanke can now use to tinker around with the lives of millions.  Here are some highlights…

“In October 2008, Congress granted the Fed power to pay interest on both required and excess reserves for the first time.  Before then, the Fed never paid any interest on bank reserves.

“This new policy is a game changer.  Before, the Fed could only raise interest rates by making reserves scarce relative to their demand.  This was done by ‘open market sales,’ or selling government bonds and debiting the reserve accounts of banks.  The reduction in the supply of reserves sent the interest rate on reserves upward.

“But now the Fed can maintain a large quantity of reserves to satisfy the banks’ desire for liquidity and still fight inflation by simply raising the interest rate that it pays on reserves without removing.

“But the Fed cannot use the interest rate on reserves as its only tool.  As the economy recovers, banks will want to lend out an increasing fraction of their reserves in the higher-yielding loan market.  To prevent excess lending, the Fed must then mop up those excess reserves through traditional open market sales and raise the Fed Funds target above the reserve rate.”

Do you got that?  Do you see how it works?  Bernanke can now keep the banks flush with cash and fight inflation at the same time.  It’s like having your cake, and once it’s gone, eating it too.

With the Federal Reserve having meddled around with the world financial system, weaving a tangled web the way they have, they must now change the rules to unravel it.  We suspect they don’t really know what their doing…and that before long they’ll have us all tied in knots.

Caught Red Handed

On Saturday we took our three-year-old son and several of his cousins to the model railroad show at the Long Beach Convention Center.  While it was an outing for the kids, your editor is still a big kid at heart when it comes to certain things…like trains.

In fact, after just 10-minutes of browsing around the elaborate train displays we were ready to convert our garage into a model railroad museum, complete with an H0 scale replica of the Southern Pacific Railroad.  We figured for just $20,000 we could create the initial setup.  Images of a tiered layout on a retractable pulley system came to mind…so we could lift it just in case we ever needed to use the garage for something other than model trains.

Surrounding us at the show was an odd collection of fellows who took model trains real serious.  There were grown men…fanatics and lunatics, no doubt…strolling around with engineer overalls or conductor hats.  Some could recite the Lionel product catalogue in reverse order from the present back to the mid-1950s.

Luckily, before we did anything rash, we remembered the many fix-its and upgrades our house needs.  So we settled for several toy steam locomotive for the kids…our son immediately busted the smokestack off his.

That night, back at the house, another one of the cousins showed up.  He thought the toy locomotives were especially cool.  So much so, that when it was time to leave, he tried to pull a fast one. 

While backing out the front door with his hands behind his back he got to the three step porch stoop and stopped.  He was paralyzed.  For he was scared to go down the steps backwards, and if he turned around, we’d see what he was holding.

Knowing he was caught red handed, he turned on the charm with a big nervous smile.  We let him squirm for a moment or two, and then said with a slight grin, “We know what you’re doing.”  That’s when his mom snatched the train from his hands, scolded him, and dragged him off by his shirt collar to the car.

He better watch it.  If he keeps it up, he’s liable to one day become President.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  On December 12, 1900, Charles Schwab & J.P. Morgan Held a Secret Meeting to Restructure the Rules of Prosperity and Financial Wealth.  At first, only a select few insiders learned about the “New Rules.”  Those elite tycoons kept the New Rules buried for many years using the new system to hoard and stockpile mountains of cash.  It wasn’t until long after the Great Depression that the New Rules were discovered by a few in the public.  And, of course, by then it was way too late for most Americans.

The Rules Have Changed Again

 

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