HEADING TO HELL IN A HANDBASKET Around 1980, the US was headed to hell in a handbasket. I have identified ten ways 1) Despite desperate rescue efforts, the dollar was crashing… Save-the-dollar Plans Started In Secret ‘Rescue Efforts Secret’ Victoria Advocate Google News Archive Nov 5, 1978 Carter and Dollar By WILLIAM GLASGALL NEW YORK (AP) – President Carter’s top economic advisors, convinced that voluntary wage and price restraints would tail, started SECRETLY PLANNING last week’s drastic action to rescue the dollar even before the voluntary plan was announced. … As both the dollar and the stock market dropped … the contingency planners, Blumenthal, Treasury Undersecretary Anthohy Solomon and Executive Assistant Richard W. Fisher, went to work in earnest and in secret. THE PLAN HAD TO BE GUARDED “FROM ANY LEAKS WHATSOEVER,” aid the source, apparently to prevent speculation and AVOID POLITICAL PROBLEMS. “We didn’t even let the deputy secretary Robert Carswell know what was going on. It was just us, the President and the vice president.” … With the dollar dropping by nearly 50 percent against the Swiss franc over 12 months, and the speed building daily, “everybody knew the foreign exchange markets had gone out of hand,” the source said. “We all cooperated. No one interfered. It all felled together.” … Grave Dollar Threats Preceded Monetary Grave Dollar Threats Preceded Monetary ‘Jolt’ Times-News – Google News Archive – Nov 15, 1978 By CLYDE H. FARNSWORTH WASHINGTON – … A sense of fear of the unknown was being transmitted to the Treasury and the Federal Reserve Board in Washington by the normally cool operators on the foreign-exchange trading desk of the Federal Reserve Bank of New York. Not only was the dollar falling precipitously in relation to such stronger currencies as the West German mark, the Japanese yen and the Swiss franc but also it was reeling against such weaker currencies as the French franc, the Italian lira and the British pound. At one point the French franc was worth 34 cents. It had brought less than 25 cents a few days earlier. “There was a sense of panic,” said one key United States central banker. … 2) Chronic deficits were destroying the dollar… Mil Mirror . Big Budget Deficits: Primary Inflation Cause Big Budget Deficits Primary Inflation Cause Times-News – Google News Archive – Sep 21, 1978 By JOHN CUNNIFF AP Business Analyst NEW YORK (AP) – Intimations that President Carter’s anti-inflation program might include wage-price standards is eliciting from business spokesmen the frustrated comment that restraints begin at home. Home in this instance is the White House, where the administration has been running big budget deficits that are seen as the primary cause of inflation. In recent years deficits are generally tolerated as pump primers for a deflated economy, but spokesmen for the business community observe that the current economy has been expanding for 41 months. In such a situation, even relatively small government deficits may be inflationary, they say. But recent deficits have been mammoth – $51.1 billion in 1978 and perhaps close to $40 billion in 1979. The President nevertheless referred to the fiscal 1979 budget as tight last week and simultanously called on Americans to prepare themselves for sacrifices in order to restrain inflation. Such behavior, said Albert Cox, Jr., head of Merrill Lynch Economics, “Is the desperation of politicians to ‘do something’ about inflation in the absence of facing up to its fundamental causes- EXCESSIVE FEDERAL SPENDING AND MONEY CREATION.” Perusing recent speeches, economic letters and commentaries a reader is convinced that a very large part of the big business community is angered that WASHINGTON POSES AS AN INNOCENT WHILE BLAMING OTHERS. Speaking to businessmen last week, Ellrnore Patterson, Morgan Gauranty’s executive committee chairman, suggested that government cannot ask sacrifices of the public unless it sacrifices itself. “There would be a better chance to build belief that Inflation can be licked if there were stronger evidence that the instrumentalities of government were determined to be full partners,” he said. “Governments that seek to solve tough inflation problems by means other than resolute fiscal and monetary action usually encounter limited success,” he said. … 3) Stop-gap efforts to prop up the dollar were losing all credibility… Dollar Tumbles In Sharp Reaction To Carter Program Dollar Tumbles In Sharp Reaction To Carter Program Sarasota Herald-Tribune – Google News Archive – Oct 26, 1978 By JEFF BRADLEY LONDON (AP) – President Carter’s new anti-inflation program was dismissed on world money in markets Wednesday as too little, too late, and the dollar plunged to new lows in heavy selling. But some experts said the plan may do some good in the long run. Foreign exchange dealers said Carter’s plan to limit wages and prices voluntarily as woefully inadequate to stem the dollar’s 18-month decline. “We had not expected much,” commented one Swiss dealer, “BUT WE HAD NOT EXPECTED SO LITTLE.” … Inflation Plan No. 2. All Those Billions Won’t Restore Dollar INFLATION PLAN NO. 2 All Those Billions Won’t Restore Dollar Sarasota Herald-Tribune Google News Archive Nov 12, 1978 By NICHOLAS von HOFFMAN AFTER THE administration’s anti-inflation plan was greeted with THE SCOFFING, SKEPTICAL RIDICULE IT MERITS, something like panic must have hit the White House. Plan No. 2, the one which is to save the dollar from foreign ignominy, cannot have been cooked up by calm and intrepidly rational statesmen. The fact that the stock market heard the news of our latest save-the-dollar expedition and took a record-making bound upward is no reason for thinking the plan makes sense. Day-to-day market fluctuations are inscrutably unintelligible; any administration which uses an uptick in the market as a validation of its policies is going to be sorry it chose such a quixotic standard of approval. It’s A Judgment The way the news was presented MAKES MR. CARTER A HERO, as if supporting the dollar were an act of patriotism like supporting the flag. We should all support the flag, but the dollar is money – and that’s business, not red, white and blue rahrah. If the announcement of this mistaken rescue attempt is to be treated like a brave cavalry charge into the guns of international finance, let it also be recognized that it’s the charge of the light Brigade and we’re going to lose the $28 billion committed to it. In the past, a number of nations have sought to prop up the price of their currency AND IT HAS NEVER WORKED. In the long run, the price of the dollar as expressed in yen, deutsche marks or francs is a businessman’s best judgment of what each of those currencies will buy. In the short run a currency may be undervalued but the administration’s contention that the American dollar has been undervalued for months and months STRAINS REASONABLE BELIEF. If dollars were really worth more than people are willing to pay for them in other currencies, someone BESIDES Secretary of the Treasury Blumenthal would understand that this is an exemplary chance to buy dollars cheap, convert them into merchandise to sell abroad and make a killing. This isn’t the first time the administration has announced it would spend money to drive up the dollar’s price abroad. It did the same thing to no effect except to lose $5 billion some months ago. Now it proposes to spend $28 billion on the supposition that the first attempt to save the dollar failed because we didn’t lose enough billions. REASONING LIKE THIS TURNS THE MIND TO FUDGE. In order to support the dollar, our government is obliged to borrow that 28 billion from Japan and Germany in marks and yen with which to go into the money market to bid up the buck. Ultimately that money, with interest we can safely presume, will have to be repaid, at which time our balance of payments, already a subject of White House gloom, will look worse than ever. And irony of ironies, they tell us one of the reasons for propping up the dollar is to balance the money inflows with money outflow to foreign nations. Get Competition Going Just as baffling is the administration’s contention it must push up the dollar to make foreign imports cheaper in the United States. The government asserts that when the prices of foreign goods go up, American domestic manufacturers raise their prices accordingly. If that’s true, IT MEANS THE FREE MARKET COMPETITIVE SYSTEM HAS DEVELOPED SOME SERIOUS HITCHES AND HICCUPS. The answer to that, however, isn’t to waste our money speculating in the foreign currency market but in restoring effective price competition here at home. In a tangential act having little to do with anything, the government also announced it would be stepping up the volume of its gold sales. Very dramatic but of no great importance. It’s nice if the government wants to sell gold, aluminum or chicken guano and make some money but it isn’t going to have any solid effect on inflation and the weakness of the dollar. … What would really be reassuring would be an announcement by the muckity-mucks in the Treasury that they understand you can’t have a sound dollar abroad unless you have a sound dollar at home. No more tricks, no more dramatics, gentlemen, please. Dull, intelligent, stick-to-it-iveness will suffice. Treasury Efforts Are Irrational SUPPORTING THE DOLLAR Treasury Efforts Are irrational Sarasota Herald-Tribune – Google News Archive – Jan 17, 1978 … The dollar is worth less abroad for the same reasons that the dollar is worth less at home. Every effort by the American government to avoid that uncomfortable fact WILL FAIL AND FAIL AT GREAT COST. The notion that the government can push up the price of the dollar, by buying Deutsche marks so as to buy back dollars with the same Deutschemarks IS INHERENTLY IRRATIONAL. … Stop-gap Action To Save The Dollar Seems Doomed Stop-Gap Action To Save The Dollar Seems Doomed The Dispatch Google News Archive Aug 18, 1978 By R GREGORY NOKES Associated Press Writer WASHINGTON – For more than a year the value of the once-prized U.S. dollar has drifted steadily downward, and no one seems to know when it will stop. Lately the decline has been worse than ever. After months of following a hands-off approach recommended by his advisers President Carter now seems determined to try to put a floor under the falling greenback, but there is reason to fear that any emergency actions to protect the dollar will be doomed to failure. The fall in the been overdone dollar has at times, particularly when it lost 5 percent of its value in a single day against the Swiss franc this week, and 8 percent in a single week in July against the Japanese yen. But the downward plunge, from all available evidence, REFLECTS REAL TRENDS AND REAL UNDERLYING ECONOMIC CONDITIONS THAT WILL NOT BE CHANGED BY STOP-GAP MEASURES. An economist for a major Midwest bank summed up the view of several experts when he said that intervention by the government to buy up dollars with foreign currencies might prop up the value of the beleaguered greenback for a time, but only for a time. Intervention in this manner has been tried before and ills considered the most-likely option for the government to take again if it decides to act. “The moral of the past is that we could expect a temporary solution at best,” he said. “But it would just be a matter of time before reversed again,” he said. Clearly the dollar is in trouble, and the cost to Americans in inflation and lost confidence has been high. The dollar has lost over 30 percent of its value in the past year against the Japanese yen and 33 percent against the Swiss franc. Only the Canadian dollar has done worse than the U.S currency. … An economist for a Washington-based research group summed up the problem: “Put altogether inflation is rising, there is no Federal Reserve backbone, the administration’s inability to get its policy” enacted, there is massive uncertainty… People are saying let’s get out of the dollar, and IT’S NOT JUST OVERSEAS, most dolIar holders are in this country. 4) In mounting its reckless dollar defense, the ESF had gotten itself in a terrible mess… When the refusal of the administration of U.S. President Lyndon B. Johnson to pay for the Vietnam War and its Great Society programs through taxation resulted huge budgets deficits and rampant inflation, the treasury began intervening to support the dollar. Mounting a Defense of the Dollar: The 1960s The restoration of normalcy in international monetary affairs in the late 1950s coincided with a shift of the US balance of payments toward deficits, by the standard measure of the day, and a drain of gold from the United States under the rules of the regime. The US Treasury therefore adopted a more active strategy to defend the dollar and gold convertibility. That shift in strategy was marked by the first postwar intervention by the United States, in March 1961. US monetary authorities realized, however, that their financial resources for dollar defense could not support large operations. They therefore cobbled together several sources to finance the effort. First, the Treasury could always draw on its reserve and credit tranches at the IMF. Second, with other leading industrial countries, they created the General Arrangements to Borrow (GAB) in order to supplement IMF resources in the event of a large drawing by the United States and formed the Group of Ten (G-10). Third, and most important in practice, the Federal Reserve opened a series of swap agreements with foreign central banks. Fourth, later in the decade, Special Drawing Rights (SDRs) were created, supplementing international reserves of all IMF member states. The expansion of the ESF thus fit into this larger mosaic of official financial mechanisms and institutions for the defense of the dollar and the fixed-rate regime. The assets of the ESF, a paltry $330 million at the beginning of this period, were increased in three ways. First, beginning in 1962, the Treasury issued FOREIGN-CURRENCY-DENOMINATED BONDS TO FOREIGN MONETARY AUTHORITIES (these were called Roosa bonds after the Under Secretary for Monetary Affairs at the time, Robert V. Roosa). Second, in 1963 the practice of ”warehousing” was instituted, which allowed the Treasury to temporarily convert foreign-currency holdings into dollars at the Federal Reserve. Third, under the Special Drawing Rights Act of 1968, SDR allocations by the IMF were deposited on the books of the ESF. These mechanisms allowed the Treasury to increase ESF assets to $2.6 billion by 1968, $2.1 billion of which WAS MATCHED BY COUNTERVAILING LIABILITIES. … The size of intervention operations over the course of the decade mounted into the billions of dollars. The defense of the dollar included support for the pound sterling, which involved loans to the United Kingdom from the ESF in 1967 and 1968. Separately, the Treasury also extended 20 credit arrangements to Latin American countries and one to the Philippines during the 1960s (see table 1). Because downward pressure on the dollar recurred with some frequency through the beginning of the 1970s, the Treasury preferred to roll over its outstanding Roosa bonds, LEAVING THE ESF EXPOSED TO A DEVALUATION OF THE DOLLAR. … Even worse than the Roosa bonds, a major component of the dollar’s defense was the secret use of OTC derivatives (forward contracts). The Fed Debate in the 1960s over Sterilized Foreign Exchange Intervention reveals the extent of the Treasury’s forward operations. 2. THE EXCHANGE STABILIZATION FUND In 1961, the Exchange Stabilization Fund (ESF) of the U.S. Treasury began to intervene in the foreign exchange markets. Its ability to intervene, however, was limited by its resources. … Because so much of its resources were tied up, the ESF intervened mainly in the forward markets [The forward contracts are a type of OVER-THE-COUNTER (OTC) DERIVATIVES]. … The dollar often traded at a large discount in the forward market. The Treasury entered into commitments to furnish foreign currencies in the future in order to reduce this discount. In doing so, it hoped to encourage individuals to hold dollar-denominated assets by reassuring them that the dollar would not depreciate in value. … In an attempt to encourage Italian commercial banks to hold dollars rather than turn them over to the central bank, the ESF entered into $200 million in forward contracts. The forward commitments of the ESF in lira and Swiss francs amounted to $346.6 million in early 1962. FORWARD COMMITMENTS, however, CARRIED THE RISK OF LOSS IF THE DOLLAR DID NOT APPRECIATE. … By 1977, Exchange Stabilization Fund, like the dollar, was nearing collapse. … when the Carter administration came to office, … THE [ESF] ACCOUNT WAS WEAK FINANCIALLY, … The foreign currency liabilities of the fixed-rate period-mainly rolled-over Roosa bonds-had created (realized and unrealized) losses for the ESF as the dollar depreciated.6 Owing to these losses, the ESF would soon technically register a NEGATIVE CAPITAL POSITION … 6. In early 1977 the Treasury had sustained losses on Swiss franc-denominated bonds of at least $278.6 million and expected TO LOSE AT LEAST SEVERAL HUNDRED MILLION DOLLARS MORE. When these issues were retired in 1979, TOTAL LOSSES SINCE 1961 AMOUNTED TO $1,134.6 MILLION. … 5) World confidence in the dollar had collapsed… Status Of Dollar And Americans Abroad Tend To Tell Us Something Status of dollar and Americans abroad tend to tell us something Lawrence Journal-World – Google News Archive – Jun 13, 1980 By WILLIAM SAFIRE … THE DECLINE of the American dollar, and the subsequent impoverishment of the American tourist or worker abroad, is a symptom of America’s ebbing influence in Europe. We are no longer resented for being rich and powerful. We are treated with SORROWFUL CONDESCENTION for being unproductive and musclebound. For the first time, America is viewed as being wholly paralyzed during an election year. Although our election-year rhetoric always favors minorities and ethnic groups, our stated government policy on both economic and diplomatic affairs has rarely been dismissed so airily by our allies Europeans … are treating Carter’s reaction to the seizure of hostages and the invasion of Afghanistan as the bellowing of a weak president anxious to appear tough to his home constituency. …many European businessmen foresee Carter’s quick abandonment of the anti-inflation ramparts. With an unemployment surge that would topple many governments, and with a threat from the left of his own party, Carter is expected TO DECLARE INFLATION DEAD FOREVER AND TO REFLATE FRANTICALLY. This would mean EASY MONEY, TAX CUTS, A FLOOD OF DEFICIT SPENDING, and if inflation spurts again before Election Day wage and price controls that would welcome the liberal left back into the Carter campaign. Economic insanity? OF COURSE … Western Europe Abandons The Dollar Western Europe Abandons The Dollar Palm Beach Daily News Google News Archive Oct 15, 1979 By MONROE FRIEDLANDER … Before last November, the only real support for the dollar was the direct intervention in the foreign exchange market by foreign central banks. Technically, what they did was to buy overhanging dollars by issuing their own currency in exchange. The dollars thus acquired became the reserve against the newly minted D-marks, schillings etc. In the 12 months preceding November 1, these foreign central banks acquired roughly $40 billion in the manner described and issued an equivalent amount of their own local money. As a result of these transactions, money supplies, especially in West Germany, Belgium and Holland, balooned materially leading to price instability. Unlike Americans, THE POPULATIONS OF THESE COUNTRIES DO NOT SIT IDLY BY WHILE POLITICANS DESTROY PRIVATE WEALTH. When the political pressure became great enough before last November, our money managers were told that if they were interested in saving the integrity of the dollar, the initiative would be theirs as THE TAXPAYERS OF WESTERN EUROPE COULD NO LONGER AFFORD TO SUBSIDIZE THE AMERICAN CONSUMER. The policy change and subsequent shift of responsibility for the value of the dollar from Bonn to Washington after last November 1 is entirely responsible for the trends of rising interest rates, galloping inflation and threatened recession we have seen these past 11 months. The wild increases in money supply and bank credit also stems, through a complicated process, from the shift of U.S. Treasury securities ownership that occurred following the November 1 decision. These trends have been further intensified by the oil price increase and renewed efforts of Europeans to roll back the inflation spawned by the preNovember dollar purchases. Interest rates have more than doubled in West Germany since last November. This factor alone has placed great pressure on the U.S. dollar and is probably responsible for the last two increases in our discount rate. The point is, the European community appears determined to avoid further inflation. They do not CONFUSE PROSPERITY WITH FINANCIAL INSTABILITY. In his last speech, the West German president said, referring to Americans, “WHAT KIND OF PEOPLE ARE THEY TO ALLOW THEIR MONEY TO BECOME WORTHLESS?” Austria has revalued its currency upward at a time when its current account balance is turning negative. This is terribly punishing to business and wage earners, yet, it has done it and in order to hold the EMS together, West Germany also will soon be forced to revalue. If dollar weakness should develop again, and there is considerable cause for concern that it will, SUPPORT ORIGINATING FROM EUROPE CANNOT BE RELIED ON. The burden falls entirely on our own money manager WHOSE ONLY WEAPONS ARE LIMITED FOREIGN EXCHANGE RESERVES (about $6 billion) and the power to manipulate interest rates. It is impossible to describe the vulnerability of the dollar without perspiring a little. Most people would not understand anyway. … ——————————– 6) Federal Reserve and its “tight money” policy were a joke… Laughing at the Fed; Monetary ‘In-Group’ Examines Ironies Of Laughing at the Fed; Monetary ‘In-Group’ Examines Ironies Of Nation’s Central Bank Operations AN EXAMINATION: FED’S OPERATIONS By EDWIN L. DALE Jr. New York Times – February 3, 1969, Monday WASHINGTON, Feb. 2 — There are many “in-groups” in this world, each with its own set of private jokes. In the monetary in-group, which just might have the prosperity of us all at stake, the biggest “yok” in town is the nation’s central bank, the Federal Reserve System. Banks are laughing at it. Economists are laughing at it. Businessmen — getting loans like crazy – are probably laughing at it. Congressmen are not in the in-group. They are just frustrated and puzzled by it. THE EASIEST LAUGH around is to ask, at a party, “Say, have you heard? THE FED IS TIGHTENING MONEY.” … The Federal Reserve, it often seems, hurls thunderbolts and nothing happens. It raises the discount rate and it furiously buys and sells Treasury bills. It watches such arcane things as the Federal funds rate and net borrowed reserves and the bank credit proxy. It tells the world solemnly that, by golly, it means business in stopping inflation. IT DOESN’T KNOW HOW, TO BE SURE. As King Lear said, “I will have such revenges on you that all the world shall– I will do such things–what they are yet I know not; but they shall be the terrors of the earth.” The Fed tells one and all that it will be the terror of the earth. And what happens? Everybody keeps on borrowing just as before. Bank and other lenders keep on lending pretty much as before. The money – for those who care about it – KEEPS ON EXPANDING. … What Makes Money tight What makes money ‘tight’? Lodi News-Sentinel – Google News Archive – Oct 5, 1979 By Louis Rukeyser NEW YORK – Some AWFULLY SILLY REPORTING is coming out of Washington these days about the tremendous debate that is supposed to be raging there over how long to continue what is described as the government’s perilous “tight money” policy. Both the reporting and the alleged “debate” are remarkably confused, EVEN BY WHAT PASSES FOR INTELLECTUAL STANDARDS IN THE NATION’S CAPITAL. For the neglected truth is that all these instant economic experts are pursuing a total phantom. In reality, as it happens, U.S. monetary policy today is about as “tight” as asize-16 dress on a size-8 model. It is, indeed, SO LOOSE THAT IT HAS ALREADY ABSOLUTELY GUARANTEED (whatever the Washington geniuses may think) ANOTHER YEAR OF VIRULENT INFLATION IN 1980. Part of the reason for the confusion can be found in the facile talk about what is termed “the high-interest-rate, tight-money policy.” Sorry, fellows, but that makes about as much sense as talking about “the white-poodle policy.” Poodles are frequently white, to be sure – but not necessarily; one can be an equally authentic poodle of an entirely different color. And A HIGH-INTEREST-RATE POLICY IS NOT, repeat not, AUTOMATICALLY A TIGHT-MONEY POLICY. What makes money “tight” is its relative unavailability. In 1974, for example, we had a true “money crunch,” when the Federal Reserve Board hit the brakes with the same excessive vigor it had earlier applied to the accelerator. Nothing of the kind has happened in recent months. Quite the contrary: the three commonest gauges of money supply (Ml, M2 and the monetary base) have all recently continued to explode upward at rates ranging from more than 10 to more than 15 percent. IF THAT’S “TIGHT MONEY,” THEN AUSTRALIA IS LOCATED IN THE NORTH ATLANTIC. Moreover, the evidence is that very few people outside of Washington have been taken in by this lately-fashionable chitchat about monetary, tautness. It you want the rest of the world’s opinion, take a look at the international markets for gold and the dollar. The former has been soaring and the latter has been collapsing – both objective votes of “no confidence” in the U.S. government’s determination to restrain the monetary growth that validates inflation. In darkest Washington, to be sure, THE ILLUSION of an oppressively tight monetary policy continues to be conjured. It appears even at the Federal Reserve Board itself, where three members resisted chairman Paul Voicker’s latest effort to bring the federal discount rate into closer alignment with market realities. The irony is that Volcker, who inherited a monetary mess, is now likely to be vilified for doing the one thing he has, in fact, conspicuously tailed to do: making money truly tight. Indeed, a close examination of the interest-rate situation reveals that even it has been produced not by monetary stinginess but by constantly escalating private demand for funds. Fact: in the last quarter, business loans grew by a whopping $9.2 billion - as compared with barely more than half a billion a year earlier, and an actual decline in the similar period of 1977. That’s why the prime rate surged past 13 percent – not because the drunken sailors at the Federal Reserve Board suddenly turned into Ebenezer Scrooge. Nor is it difficult to figure out why the demand for credit continues to burgeon, even at interest rates that not long ago WOULD HAVE BEEN ASSOCIATED WITH TEETERING BANANA REPUBLICS. Why not borrow at 13′ percent, when the latest inflation rate is 13.2 percent? it’s free money, by historical standards, with virtually no premium over current inflation demanded by the lender. No wonder corporate treasurers continue to line up at the bank window. The misunderstood reality is that, with brief exception last winter, monetary policy has been OVERLY LOOSE AND OVERLY INFLATIONARY. That’s what truly keeps interest rates high – and the only authentic way to bring down interest rates is to bring down inflation. Washington ought to loosen up on the cliches and tighten up on its thinking. 7) Keynesian economics and its promises of PERPETUAL PROSPERITY were not working… COSTLESS PROSPERITY ON A PERMANENT BASIS Planned Treasury Deficits New Administration Economy Plan Planned Treasury Deficits New Administration Economy Plan Sumter Daily Item – Google News Archive – Jan 29, 1965 By SAM DAWSON NEW YORK (AP) – Managing the economy by a new set of rules in Washington may be up later this year for its first real test. The idea in favor now with President Johnson, his economic advisers, and -they hope – with the Congress, calls for PLANNED TREASURY DEFICITS because TODAY’S RECORD PROSPERITY STILL ISN’T AS PROSPEROUS AS IDEALLY, IT COULD BE. And the idea calls for reliance on tax cuts as a quicker stimulant than increased government spending if the economy falters. But to MAKE RECESSIONS OBSOLETE, the new economic managing policy also holds that if MORE SPENDING seems to be the cure it MUST BE APPLIED MUCH MORE RAPIDLY THAN IN THE PAST. In practice, this would give the President the authority to start spending programs as soon as unemployment lakes a turn for the worse. Midyear may see a test of this theory of fiscal management of the economy - of putting PROSPERITY ON A PERMANENT BASIS – of making it more nearly all inclusive tlrmi it is today. … [It didn't work] EXPECTING A MIRACLE William Satire . The Road To Deflation Is A Rocky One The Road to Deflation … Milwaukee Journal – Google News Archive – Sep 6, 1974 … one of our central problems is that we do expect a miracle; specifically, THE SLOWING OF INFLATION WITHOUT THE SLOWING PAINS OF UNEMPLOYMENT. … President Johnson’s “Great Society, based on the fallacy of Keynesian economics, had assured an entire generation that they could have their cake and eat it too. Throughout the 1960s, politicians promised that we could wage war on foreign soil, control pollution, rebuild our medical system, overhaul our transportation network, guarantee the good life to the poor and elderly, provide a college education for everyone, feed the world, improve our weapon systems, and continue to increase everybody’s disposable income – ALL AT THE SAME TIME. IT WAS A FOOLS PARADISE, and the Nixon administration was determined to do everything humanly possible to break the crazy cycle of boom and bust that had begun with the decade that encompassed the Great Society and led to STEADILY WORSENING INFLATION, RECESSION, ECONOMIC DISLOCATIONS, AND INSTABILITY. Chronic deficits, coupled with President Johnson’s irresponsible spending, had weakened the dollar terribly. … 8) The US was fighting a war on gold… and losing quite badly… Quiet Pooling Of Resources Stabilizes The Gold Market Quiet Pooling of Resources Stabilizes the Gold Market Fort Scott Tribune – Google News Archive – Feb 26, 1963 By SAM DAWSO?’ AP Businss News Analyst NEW YORK (AP) – United States money transactions with the rest of the world have taken a turn for the worse in recent months. But there’s been nothing that could be called a new raid on its gold reserves, Times have changed. … the stability of gold and the evident strength of the dollar in world financial markets is cause of considerable satisfaction. Much of the thanks goes to the group of central bankers, American and foreigners, who have rigged up a device to halt the raids that in the past unsettled one or another currency and for a brief period put the American dollar under strain to the surprise of most Americans who thought it as good as gold. The group acts quietly. In fact, American money managers have never officially said the United States was taking part. But the success of this quiet pooling of international financial resources to protect currencies against the stress of temporary ups and downs of trade and financial balances shows plainly in the stable gold market as reported daily from London. This week prices have been below $35.08 an ounce, making any buying of U.S. government gold unprofitable. This very real, if officially unannounced, international gold pool keeps the London free market stable simply by buying when the price is below the official U.S. Treasury figure. When the price goes above that figure the pool can step in and sell. This swells the amount of gold available and as the supply goes up the demand is met and the price returns to the desired level. The pool doesn’t pretend it can protect the dollar forever if the balance of payments deficit keeps mounting. That is why the United States has taken many measures to boost the total U.S. exports on one hand and to discourage the outflow of dollars on the other. The measures have fallen short of their goal. … Us Looked To For More Gold Action U.S. Looked To For More Gold Action Daytona Beach Morning Journal – Google News Archive – Dec 18, 1967 LONDON (AP) – Financial experts in London looked to the United States Sunday for measures to halt panic buying of gold, which is expected here to continue in the world’s bullion markets. … The London experts expressed doubt of U.S. ability to stem the flood of buying orders which have poured in on all bullion markets since Britain’s Nov. 18 devaluation of the pound. Authoritative estimates put the amount of the metal that has moved out since then through the international gold pool in London at more than 1,000 tons worth about $1.1 billion. Nearly 60 per cent of that gold came from the United States. The experts explained the gold rush as a coincidence of widespread loss of faith in paper money as a result of the pound’s devaluation, inflation in much of the world, and a broad belief held by international speculators that the price of gold must rise. Some British economists and politicians add to this their feeling that President charles do Gaulle of France may have had a hand in fomenting the gold rush. The French, however, strenuously deny this. France withdrew from active participation in the eight-nation international gold pool, which operates out of London, in June when Paris refused to supply more gold. The pool was set tip in 1961 to stabilize the gold market by buying or selling the metal as needed to satisfy demand. … The dollar came under pressure Friday in Europe’s money markets, except in London, after showing strength all week despite the gold rush. The sale of dollars by European holders showed the fear of many on this side of the Atlantic that the dollar was weak because of the continuing-and increasing-deficit in the American balance of foreign payments. … The TIME article below was written in March 1968, as the “London Gold Pool” collapsed under a speculative gold stampede . Speculative Stampede Friday, Mar. 22, 1968 Quietly and secretly, technicians at Fort Knox, Ky., loaded an estimated $450 million worth of gold ingots [about 410 tons of gold] onto a heavily armed convoy. The convoy proceeded to a nearby U.S. Air Force base, where the gold was loaded aboard a transport plane and flown to Britain. There, it was sent to the Bank of England, to be transported by Swissair and British European Airways flights to the coffers of Swiss banks. The influx of gold became so bulging, in fact, that one Swiss bank had to reinforce the walls of its vault to contain it. It was all part of the largest gold rush in history, a frenetic, speculative stampede that last week threatened the Western world with its greatest financial crisis since the Depression. Socks & Mattresses. Telephone and telex lines to London, the world’s largest gold market, were swamped as buyers throughout Europe demanded gold, gold and more gold. More than 200 tons, or $220 million worth, changed hands on the London gold market in one day to establish a new single-day trading record. Where gold could be bought directly, mob scenes erupted and the price soared. Ten times the usual number of buyers jammed the gold pit in the cellar of the Paris Bourse, and fist fights broke out as the price on one day rose to $44.36 an ounce v. the official price of $35. In Hong Kong, frantic trading drove the price up to $40.71, and around the world investors and banks bought gold certificates and gold stocks. Many refused to accept the U.S. dollar in payment. In dozens of nations, from Austria and Italy to Sweden and Ireland, ordinary citizens rushed out to buy gold coins to stuff socks and mattresses, cleaning out numismatic stocks virtually overnight. In London, a $20 U.S. gold piece sold for $56, a £ 1 British sovereign for $10.20. In Geneva, the Swiss lined up at tellers’ windows to convert their savings to gold bars. There was even a run in Hong Kong on gold jewelry. All told, between $1 billion [910 tons] and $2.5 billion [2270 tons] in gold may have changed hands within ten days in London-as much as 10% of the total gold in the seven-nation Gold Pool, whose bullion reserves are the cushion for the $35 international price of gold. No estimate was possible of all the other trading in gold around the world, except that it was colossal. Lost World? The rush was on because speculators-some avaricious, some panicky, some merely prudent-had become convinced that the U.S. and its partners could not much longer maintain the $35 price. With a balance of payments deficit of $3.6 billion last year and a war in Viet Nam that is costing some $30 billion annually, the U.S. has seen its gold reserves shrink by 50% from a postwar peak of $24.6 billion. Now, believed the speculators, the U.S. was nearing the end of its gold tether. If the U.S. could no longer sell gold to all takers at $35 an ounce and the price were allowed to rise to meet the demand, the speculators stood to make a handsome profit, just as they had in the devaluation of the pound sterling last November. Having tasted blood then, many scented another kill -and, in their wild buying, ripped and clawed at the remaining gold stocks in the Gold Pool. Who were the speculators? The identity of most was veiled in the secrecy of Swiss bankers’ files, but they were situated throughout the world. Perhaps as much as 40% of Swiss bank purchases were destined for safekeeping in the coffers of Middle Eastern sheiks and oil potentates. Latin American businessmen, affluent overseas Chinese, Asian generals-all claimed a piece of the action. The central banks of many smaller nations with precarious national reserve margins, including some Communist Eastern European countries, had undoubtedly joined in to protect themselves. More in sorrow than in greed, European corporations moved into the buying to hedge their foreign-currency holdings. So did some wealthy Americans with numbered Swiss accounts, although it is illegal for U.S. citizens to own gold bullion. For the men who understood the situation best, the spectacle was appalling. “The world is lost,” said London Economist John Vaizey. “A rise in the price of gold is inevitable now. It’s like a grand opera of which the overture is over, and we’re in the first act of a world depression.” A usually unemotional Swiss banker warned that “in participating in gold speculation, capitalists are doing their best to destroy the capitalist system. If they win the battle in London, the probability is that the whole present international monetary system will come crashing down.” French Economist Jacques Rueff, who has long predicted a crisis and argued for a rise in the price of gold, saw his worst jeremiads vindicated. “Whether one wants a gold price increase or not,” said Rueff, “it will soon be achieved.” Two-Tier Price. Finally, the pressure grew so great that the U.S. refused to continue to feed gold to satisfy speculators’ greed. In a telephoned message to British Chancellor of the Exchequer Roy Jenkins, the U.S. asked Britain to close the London gold market and shut off the flow from the Gold Pool. Prime Minister Harold Wilson hurried to Buckingham Palace for a midnight meeting with Queen Elizabeth, who declared a bank holiday in foreign-exchange trading. That shut off the Gold Pool’s dealing, and money markets from Singapore to Lusaka followed suit. The Paris market alone stayed open. The U.S. then invited representatives of the Gold Pool nations to Washington for a weekend conference. There was little doubt that the speculators had succeeded in wrecking at least part of the world’s monetary system, and that the U.S. and the other members of the Gold Pool would no longer sell gold to all takers at $35 an ounce. What would likely be decided in Washington was a “two-tier” pricing system for gold, by which the speculators would have to conduct their transactions in a free market. … Gold Pact Stopgap Solution Gold Pact Termed Stopgap Solution Spokane Daily Chronicle – Google News Archive – Apr 8, 1968 “World opinion seems to be that the recently created two-price gold system is but A STOPGAP IMPROVISATION to buy time in which to effectuate more stable arrangements” So wrote Henry L. Day, Wallace, president of Day Mines. Inc., in the firm’s annual report to stockholders. The world’s lost confidence in the dollar was not restored through the recent removal by Congress of the 25-per-cent gold cover against United States paper money, he said … Us To Guard Gold Slump pleases planners U.S. to guard gold Montreal Gazette – Google News Archive – Nov 12, 1969 WASHiNGTON – (DJ) – A SCHEME BEING SECRETIVELY SHAPED here to guard the Treasury’s gold stock helps warrant the plummeting of private-market gold prices in Europe, U.S. officials said yesterday. Already, the clearly pleased planners say, inklings that it is to be forthcoming are buttressing such other factors as shadowy but sizable new South African sales in driving down the London gold price. The afternoon gold fixing price in London yesterday was $37.75, down 32½ cents from the morning and down 60 cents from Tuesday afternoon. The plan, being negotiated with financial allies, is intended to insulate the U.S. gold stock of $11,160,000,000 from a potential drain of hundreds of millions of dollars worth posed by smaller nations’ needs to contribute extra amounts of the metal to the international Monetary Fund. It is understood the broad strategy includes shortchanging the 113-country IMF on the metal itself, in return for the prospect of the IMF obtaining off-setting amounts of hard currencies several years hence. More important from the standpoint of private speculators, sources indicate, is that the operation can be carried out without bringing any newly mined gold from South Africa into official channels – and thus without damaging the two-tier gold price system. A precedent for at least one aspect of the plan, analysts note, lies in an almost unnoticed tactic employed in the previous IMF quota or contribution increase initiated in 1965. Likely to be repeated with some variation as one part of a multifaceted effort in 1970, they say, are dealings along these lines: Denmark, for example, finds that it can’t comply with the rule requiring that 25 per cent of its quota increase must be in gold (75 per cent is regularly in a country’s own currency) unless it buys gold from someone else. Usually the U.S. Treasury would be the source since the U.S. underpins the value of the dollar by generally standing ready to pay out gold in return for dollars from other governments at the fixed price of $35 an ounce. If Denmark turned to South Africa, it would violate the March 1968 pact intended to freeze the total gold holdings of all governments and official institutions at their existing level, while leaving the private market to receive all the fresh supply at a freely-moving price. Instead of taking either of these system-weakening avenues, Denmark would turn to the IMF for a loan, receiving for instance German marks. Denmark would use the marks to buy gold at the official price from the German government and deposit the gold with the IMF, thereby meeting its obligation. But the IMF would sell the gold right back to Germany in return for marks, thus replenishing its holdings of that currency. Gold Soars Again, Dollar Still Slumping Gold soars again, U.S. dollar takes beating Pittsburgh Press – Google News Archive – May 15, 1973 LONDON – (AP-UPT) – Speculation that the Watergate scandals may force President Nixon to resign helped drive the U.S. dollar to record lows in Europe yesterday and pushed gold prices to all-time highs. The dollar plunged to new lows in Paris, Frankfurt, Zurich and Oslo. It weakened in other European centres, but in late trading there was a slight improvement in dollar rates, cutting a small fraction off the day’s losses. Gold rocketed $7 an ounce in the first hour of trading, setting record prices of $113 an ounce in Zurich and $112.50 an ounce in London, the two biggest bullion markets in the world. The metal held nearly all the gain, closing at $112 an ounce in both centres. Dealers called the gold and money markets extremely nervous… CONFIDENCE LOW Dealers here and on the continent suggested that even without the speculation on Nixon’s future, confidence in the U.S. dollar was at a low ebb any way. “Name me a single reason why the dollar should be stronger,” a Zurich banker said. Market sources agreed confidence in the twice-devalued dollar has been sapped by fears of a new inflationary pressure in the United States, the continuing U.S. balance of payments deficit, and concern that Watergate has weakened Nixon’s ability to bring off trade and monetary reforms. Gold and dollar markets are related. Investors lacking confidence in the dollar have been getting out of the U.S. currency and buying gold. … http://www.reserveasset.gold.org/central_bank_agreements/ Central bank agreements on gold 2009 – European Central Banks renew CBGA 1978 – The IMF attempts to write gold out of the system The purpose of the Second Amendment of the IMF Articles was to delete gold from the international monetary system. It followed the failure of attempts to establish a new international monetary system, and in particular the failure of attempts by European countries to force the United States to settle its deficit in gold, or to devalue the dollar against gold. Far from agreeing to keep gold in the system, THE UNITED STATES THEN LED A CRUSADE AGAINST GOLD (while being careful to keep a very large strategic stock of gold in its own reserve, sealed off from the outside world). This amendment BARRED MEMBERS FROM FIXING THEIR EXCHANGE RATES TO GOLD and removed the obligation on members to conduct transactions in gold at the official gold price. To symbolize the plan to drive gold out of the system, the Fund was instructed to dispose of 50 million of its stock of 153 million ounces, partly by sales to the market and partly by giving some gold to members in relation to their quotas. Ironically, THIS EXERCISE HAD THE EFFECT OF SPREADING GOLD MUCH MORE WIDELY THROUGH THE INTERNATIONAL COMMUNITY THAN EVER BEFORE, and GAVE MANY COUNTRIES A NEW INTEREST IN THE GOLD MARKET. Few countries showed any inclination to sell the gold handed to them and in the vast majority of cases it continues to sit on their books. Us Boosts Gold Sales To Strengthen Its Dollar . U.S. boosts gold sales to strengthen its dollar Montreal Gazette – Google News Archive – Aug 23, 1978 WASHINGTON (AP) – The government took its second major step in less than a week to support the U.S. dollar yesterday by announcing plans to sell three million more ounces of gold from its stockpile. The sale is intended to bring more money into the US, and reduce the country’s balance-of-payments deficit, which is a major cause of the dollar’s decline. It is also intended to reduce U.S. Imports of gold. … U.S. Gold Sales Tied to Dollar’s Health; U.S. Gold Auctions Tied U.S. Gold Sales Tied to Dollar’s Health; U.S. Gold Auctions Tied To Stability of the Dollar New York Times – September 22, 1979, Saturday By CLYDE H. FARNSWORTH WASHINGTON, Sept. 21 – A high Treasury official said today that, if the current gold-buying fever had an adverse speculative effect on the dollar, the United States would open the vaults at Fort Knox for EVEN LARGER AMOUNTS OF BULLION TO OFFER AT MONTHLY AUCTIONS. ‘Easy Money’ Can Explain Financial Woes ‘Easy Money’ Can Explain Financial Woes Palm Beach Daily News Google News Archive Oct 15, 1979 By MONROE FRIEDLANDER … The rising price of gold is recognition that DESPITE ALL THE TALK ABOUT FIGHTING INFLATION, THE TREND OF REAL MONEY GROWTH AND INTEREST RATES IS SUPPORTING AND ENCOURAGING HIGHER PRICES ALL THE TIME. … … the growth of money supply must be forced down below the inflation rate. When this happens as a fact, or evidence accumulates that it is going to happen, gold will stop rising, … 9) Faced with imminent doom… Something needed to be done… … By the end of the 1970′s, we had reached stage two [of currency collapse]. The Appendix to the Minority Report contains a number of charts and tables that graphically depict the gravity of the situation as seen by contemporary observers. We reproduce a few below for ease of reference. The Consumer Price Index had reached worrying levels. Source: Minority Report Appendix, Chart 3 … People were indeed becoming inflation-conscious. Contracts routinely contained inflation adjustment clauses, and housewives were beginning to buy that frying pan sooner rather than later. The bounty needed to induce people to hold dollar-denominated assets was skyrocketing, at both ends of the yield curve. Long term nominal interest rates were stratospheric, reflecting utter destruction in the bond market. Source: Minority Report Appendix, Chart 9 Short term rates were climbing too. Source: Minority Report Appendix, Chart 5 … Ominously, the fiat monetary system had already lost several pitched battles in its war with gold. Lacking today’s price management technology, the U.S. and European monetary authorities had been forced to attempt to quell the gold price by means of open sales of physical metal throughout the preceding 18 years. The London Gold Pool of the 1960′s had broken down in abject failure in March 1968, leading to the abrogation of the Bretton Woods gold exchange monetary system three years later. The U.S. Treasury gold sales of the 1970′s ended in 1979, and the last of the parallel sales by the International Monetary Fund occurred on May 7, 1980. Like interest rates, and despite the best efforts of the monetary authorities, the gold price was soaring, hitting $850 in the afternoon London fix on January 15, 1980. The false premise at the core of the fiat monetary system, the conceit that paper printed by a government bureau is money and that gold is not, was being exposed for all to see. Source: Minority Report Appendix, Chart 1 Public confidence, the essential support for fiat money, was at risk. The memory of gold as money had not yet been fully extinguished, … The very structure of the system was eroding. … new banks were being formed under state statutes, and existing members were quitting the Federal Reserve System altogether, switching their charters from federal to state … The power of the central bank, the linchpin of the fiat monetary system, was waning. SOMETHING HAD TO BE DONE. … Nation Needs To Listen To Martin Feldstein Nation needs to listen to Martin Feldstein Daily Reporter – Google News Archive – Dec 14, 1983 WASHINGTON – It is easier to understand the problems of Martin Feldstein than to understand the federal deficit, so the country is getting a little preview of why the American economy could be a disaster area after the 1984 elections. Feldstein is a 44-year-old economist who was almost fired as chairman of President Reagan’s Council of Economic Advisers – for a classic reason - speaking unpleasant truth. The deficit is becoming a $200 billion-a-year monster. That is four times more than what is was when Reagan took office promising to eliminate it. But who can understand numbers like that? It really is not going to cause you or me much trouble in the immediate future. The deficit may kill us in a couple of years, but that won’t be obvious by Election Day. Nov. 6. 1984. Until then. Republicans and their leader do not want Feldstein pointing out things such as the fact that the deficit is currently 10 times as high a percentage of the gross national product as it was from 1955 to 1961, or twice as high as it was during the “big spending” years of 1975 to 1981. Demonstrating that these deficits are unlike anything in American history was what got Feldstein in trouble at the White House. Until he begun shooting off his mouth, It didn’t seem likely that voters would get excited by economists’ arguments about spending and borrowing and interest rates. But almost anyone can relate to the drama of a guy getting kicked out for blowing the whistle. Maybe some of us will begin to realize that SOMETHING IS ROTTEN IN WASHINGTON – VERY ROTTEN. Those sweet Republicans at the White House and those nice Democrats in Congress are all in on it. This is what is going on: The Reagan administration is spending more and more money and taking in relatively less and less because it has reduced the taxes paid by the wealthiest quarter of the population. That might work if spending were cut at the same time, but that is not being done. There have been cuts in some programs for the poor, but not in the great benefit programs of the middle class: Social Security and Medicare. So, under Reagan, we have: (1) big increases in military spending; (2) small cuts in other spending; and (3) relatively lower taxation. Reagan is doing something like what he said he was going to do back in 1980. But the difference is that he didn’t say he was going to borrow the money to make up the difference between what he wants and what he has the political guts to ask the American people to pay for. That borrowing, in lieu of sacrifice, is the growing deficit. Once again we have a president who talks about “sacrifice” but is afraid to ask anyone likely to vote actually to give something up. Most taxpayers are being tricked into giving their money to the military and their financial betters. But they are going to give twice – now and after 1985, when taxes, interest rates and inflation will start going up to pay the bills of 1981 to 1984. The worst will come in about two years when there will be either: - a depression or deep recession as corporations and individuals are unable to borrow because the federal government will be taking even more of the country’s available credit to pay off $300 billion deficits; - or money will be printed in quantities large enough to pay the government’s bills and start THE WORST INFLATIONARY CYCLE AMERICANS HAVE EVER SEEN. Reagan obviously doesn’t want to talk about that. Neither do most Democrats, … So Martin Feldstein stands there, rather heroically, like the boy on the burning deck. He will now be pushed into the ocean to drown, and the captain and crew will say there is no fire. … 10) The entire US financial system was nearing insolvency… Rough Going For Savings & Loans solvency Rough going for Savings & Loans solvency High interest rates threaten Thrifts’ Rock Hill Herald – Google News Archive – Jun 9, 1981 WASHINGTON (NEA) – The nation’s savings and loan associations are in bad financial shape. These so-called “thrift institutions” are being forced to pay high interest rates on the money they borrow from the government and from commercial banks while receiving their income from loans made at earlier, much lower rates. The result has been a continuous flow of red ink that is threatening the whole system of savings and loans. Dale Riordan, a spokesman for the National Savings and Loan League, says that U.S. thrift institutions lost $688 million in the first three months of 1981. He forecasts losses of about $1.5 billion for the first half of this year. Others are predicting losses closer to $2.5 billion for the first half and $6 billion for the year. More than 90 percent of the nation’s savings and loans are insured by the Federal Savings and Loan insurance Corp. That federal agency is the thrift institutions’ counterpart of the Federal Deposit insurance Corp., which insures most of the nation’s commercial banks. An average of fewer than one FSLIC-Insured savings and loan has failed in each of the past 35 years. When a small institution goes under the agency simply pays off its depositors and sells its loan portfolio to another savings and loan in the area. In other cases, the FSIIC arranges the merger of the failed savings and Loans with a stronger one in the area and compensates the acquiring thrift for any losses suffered in the transaction. This plan works fine when the failure rate is only one or two institutions a year. But now the FSLIC has 251 institutions on its “problem list” of those that must be watched closely because of their financial conditions. The list is said to be larger than ever before and to be growing by the month. An agency source says that if interest rates continue at or near current levels for the rest of this year – as many forecasters think they will – as many as 150 thrift institutions may lose their entire net worths and be at least technically insolvent by year’s end. Another 150 could become insolvent if high interest rates continue into 1982. The FSLIC is not equipped to handle a problem of such magnitude. Its reserves, which are used to bail out falling institutions and to assist in mergers, amount to about 46.5 billion. Last year alone it used up almost $1 billion to rescue three savings and loans. Worst still is the near impossibility of finding healthy savings and loans willing to merge with insolvent institutions despite the FSLIC’s ability to make up any losses incurred in the transaction. This problem was until recently compounded by legal restrictions that such mergers occur only between savings and loans in the same state. Although the FSLIC now can go out of state to arrange mergers, few thrift institutions are secure enough to be viable partners for failed institutions, especially those of any size. … If the small banks defeat the FSLIC plan, the only real hope left to the nation’s thrift institutions is that interest rates will somehow plummet over the next few months. But no one has much confidence that this will happen. 1978 to 1982 was a transition period Time Magazine reported that rarely, if ever, had the signs been so confusing . Monday, Sep. 06, 1982 Hope and Worry for Reaganomics By GEORGE J. CHURCH;Gisela Bolte;Frederick Ungeheue … Rarely has the search for omens been as anxious as now, when business is still mired in a slump that has driven unemployment to the highest point in 41 years and bankruptcies to the worst level in half a century. And rarely, if ever, have the signs been so confusing. The forecasters who try to figure out the prospects for jobs, prices, production and incomes are in the position of A MOTORIST APPROACHING A SCHIZOID TRAFFIC LIGHT THAT IS FLASHING GREEN, AMBER AND RED SIGNALS ALL AT ONCE. default iconwinmail.dat
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While it may have appeared the US was heading towards an economic collapse on the order of the great depression, it didn’t happen


1)  Despite desperate rescue efforts, the dollar was crashing…

Intervention efforts were abandoned, and the dollar rallied.



Dollar soars as ESF announces the suspension of foreign exchange intervention


Dollar Fluctuations and the Debt Crisis: The 1980s and Early 1990s

The advent of the Reagan administration brought a fundamental change in exchange rate policy. The new Under Secretary for Monetary Affairs, Beryl Sprinkel, announced the suspension of foreign exchange intervention except in extreme circumstances, for which only a handful of instances qualified over the following four years.


2)  Chronic deficits were destroying the dollar…

The deficits exploded out of control without causing inflation.





Deficits exact toll of Reaganomics
Anchorage Daily News – Google News Archive - Aug 3, 1986

The president, … has already proven an extraordinary innovator. THE INFLATION THAT DOGGED HIS THREE PREDECESSORS IS NO MORE THAN A MEMORY, the benefits of LOWER INTEREST RATES AND FALLING OIL PRICES are still at work, and it is easier to buy a house than it has been since the 1970s.

Above all, the president promised a balanced budget, but his insistence on raising military spending, his refusal to raise taxes and his reluctance to cut back on Social Security have PUSHED THE DEFICIT BEYOND WHAT ANYONE IMAGINED IT WOULD BE WHEN REAGAN TOOK OFFICE.

… the president and Congress took a national debt of nearly $1 trillion, amassed over more than 200 years, and doubled it in six years


3)  Stop-gap efforts to prop up the dollar were losing all credibility…

The Stop-gap efforts worked, thanks to the MAGIC OF DISINFLATION.


The dollar was quite strong on foreign exchange markets in the first five months of 1979, following the tightening of U.S. money market conditions and the announcement by the Treasury and the Federal Reserve of a dollar support program on November 1, 1978. The dollar rose more than 5 percent on a trade-weighted average basis, gaining 5-1/2 percent against the mark, 7-1/2 percent against the Swiss franc, and 14-1/2 percent against the yen between the end of December and the end of May. During this period, U.S. and foreign monetary authorities entered the markets to moderate exchange rate movements, reversing in the process a large portion of their 1978 intervention purchases of dollars. By the end of May the Federal Reserve had repaid all its outstanding swap debts to other central banks, the Treasury had reconstituted all of the balances it had raised through the issuance of foreign-currency denominated notes, and the Federal Reserve and the Treasury both completed repayment of their pre-1971 Swiss franc indebtedness.





Disinflation Is Here To Stay


Disinflation is here to stay
Montreal Gazette – Google News Archive – Sep 11, 1984
By Hugh Anderson

What’s the connection between the falling price of gold, the stable price of oil and the soaring U.S. dollar? And should you care?


It’s disinflation,

Disinflation,describes a “policy designed to remove or offset the inflationary elements in a country’s economic situation without incurring the bad effects of deflation.”

Until quite recently the majority view among financial experts was that the return of booming economic conditions in the U.S. would inevitably bring A POWERFUL RESURGENCE OF INFLATION ALONG WITH IT.

On this view, the 1980’s were to be a rerun of the 1970s, only worse.

though, as I’ve been noting in this space for quite a while.

‘Most likely prospect’

What’s interesting is that a growing number of financial experts are now changing their assessment of the odds.

And among them recently was a Montreal-based forecasting service with an international reputation, the Bank Credit Analyst.

In the September issue of one of its publications the firm’s analysts concluded, after reviewing all the available evidence, that disinflation is “the most likely long-term prospect.”

This does not mean that there won’t be periods in which inflation accelerates.

But, in contrast to the 1970s, IT WILL NOT CLIMB TO NEW HEIGHTS. And taking upswings and down-swings into account, INFLATION WILL PROBABLY BE IN A DOWNWARD TREND, which is the essence of what’s meant by disinflation.


Although common sense, logic, and the laws of economics were all pointing towards a dollar collapse, "things didn’t work out that way."


As for questions like WHY did interest rates enter into a thirty year downward trend or how the hell does this disinflation thing work. Don’t ask.  IT’S MAGIC!

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4)  In mounting its reckless dollar defense, the ESF had gotten itself in a terrible mess…

The Exchange Stabilization Fund started earning returns that would make Bernie Madoff Jealous.

… Because the dollar rose
the Carter bonds earned a substantial profit for the general fund when they were fully retired by July 1983.

In 1979 and 1980
the Treasury Department intervened in the foreign currency markets fairly frequently, using appreciations of the dollar as opportunities to buy foreign exchange (see figure 1). These operations served the purpose of stabilizing the dollar, raising the foreign currency with which to redeem bond debt, and building a ‘‘war chest,” as Under Secretary Solomon described it, for the future. Previously, the ESF had never held a substantial long-term net reserve position, that is, a stock of foreign currencies that Treasury did not owe principally to European central banks. The Carter administration Treasury sought to eliminate this dependence on foreign monetary authorities, which was particularly important given its judgment that the dollar’s strength could be temporary. Between October 1979 and mid-February 1981, the Treasury and the Federal Reserve purchased roughly $7 billion in foreign currencies, mostly German marks, building a combined net position of $6 billion equivalent, compared with a net liability position of $3.5 billion in September 1979 (Pauls 1990, 903-04).




A change in the law, in 1970, allows the Secretary of the Treasury, with the approval of the President, to use money in the ESF to "deal in gold, foreign exchange, and other instruments of credit and securities."[5]


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5)  World confidence in the dollar had collapsed…

The US implemented “MEDIUM-TERM FINANCIAL STRATEGY” and the “psychology of inflation” was successfully broken.


Dollar was turned into a confidence trick.





Over recent years there has been an increasingly medium-term orientation of policies in many countries. One important motive has been the reduction of inflation expectations


As they have developed over recent years, the rationales for medium-term financial strategy involve four distinguishable strands:

the search for convergence between monetary and fiscal stance in order to better control monetary growth and inflation expectations;
b) the need to alleviate the "supply side" distortions associated with too rapid a growth of public spending relative to nominal income;
the concern that high budget deficits may "crowd out" private investors from financial markets, implying that priority be given to the reduction of government borrowing in order to lower interest rates; and
the problems of servicing growing amounts of public sector debt in the context of high real interest rates.

A. Medium-term budgeting, monetary targets and inflation control

The inadequacy of conventional short-term public sector financial planning showed up most clearly, in the first half of the 1970s, in excess monetary growth and increasing inflation expectations. To prevent a recurrence of these phenomena, increased emphasis has come to be placed on medium-term monetary stability.



The strategy was introduced TO INFLUENCE EXPECTATIONS… It was also the first time an economic strategy was introduced in Britain BASED ON MONETARIST IDEAS.

The MTFS was intended dramatically TO INFLUENCE THE ATTITUDES AND EXPECTATIONS OF THE PUBLIC. By ANNOUNCING PUBLICLY that macroeconomic policy would henceforth be shaped in order to reduce inflation, through tight monetary and fiscal policy, the strategy’s sponsors hoped to influence the actions of managers, trade union wage bargainers and the financial markets. … the MTFS indicated that the Treasury gave priority only to reducing inflation.

On a political level
this approach placed the onus on the MTFS remaining credible. Credibility has been highlighted as the vital element in anti-inflation economic strategies (Schelling 1982). This is a HIGH-RISK APPROACH since the Treasury was required TO CONVINCE THE PUBLIC OF THE SOUNDNESS OF THE ECONOMIC THEORIES UPON WHICH POLICY WAS BASED, and convince them that policy would not be relaxed should unemployment rise. …


As you can see


7)  Federal Reserve and its "tight money" policy were a joke…

Federal Reserve and its "tight money" became a legend

October 6, 1979: US Federal Reserve Announces Tightening of Money Supply


October 6, 1979: US Federal Reserve Announces Tightening of Money Supply

The US Federal Reserve, under recent Carter appointee Paul Volcker, declares that it will begin a major policy shift by tightening the money supply. Its main method of doing so will be significant increases in the interest rate. [Campbell, 2005, pp. 194-195]



THE STINGINESS WAS SHORT-LIVED. Things changed dramatically in July 1982. From that point on, the Fed put the hammer to the floor and inaugurated what would become its standard response thereafter to any perceived systemic threat: EXTREMELY AGGRESSIVE MONETARY EXPANSION. The specific catalyst for this was the failure on July 6, 1982, of a “reckless little bank in Oklahoma” known as Penn Square.[27] Penn Square’s paper was widely held by a number of important money center banks whose failure in turn was not an attractive prospect to the monetary authorities. A more general catalyst was the imminent sovereign default of Mexico.

Over the next five years, non-borrowed reserves (“NBR”) expanded at a heroic rate, roughly doubling the levels at the beginning of the Volcker Fed.

Indeed, Richard Timberlake marshals the foregoing data to support his charge that Volcker’s Fed, far from being monetarist in its policies, was just another Fed, ramping up the money supply to aid an incumbent president in an election year, and choking back once the results were in.[29]


Volcker goes down as a giant in history

Monday, Jun. 20, 1983
He Promised, and He Delivered

The U.S. was on the verge of a financial crisis when Paul A. Volcker became Federal Reserve Board chairman in August 1979. Inflation was roaring ahead at an annual rate of 13%, and the dollar was sinking on international money markets. Worldwide confidence in the Government’s ability to manage the American economy had seldom been lower. TODAY INFLATION HAS SLOWED TO LESS THAN 4%, AND THE DOLLAR HAS BECOME THE WORLD’S STRONGEST CURRENCY. Many experts attribute that remarkable turnaround largely to Volcker. Says Harvard Economist Otto Eckstein: "VOLCKER WILL GO DOWN AS A GIANT IN HISTORY." Concurs Henry Kaufman, chief economist at Salomon Brothers: "Volcker has demonstrated an extraordinary capacity as a defender of the integrity of our currency."


Greenspan Takes Fed Reins


Greenspan Takes Fed Reins
News-Journal – Google News Archive – Aug 12, 1987

WASIITNGTON (AP) — Alan Greenspan took over as the nation’s money czar on Tuesday, succeeding Paul Volcker, who gained NEAR-LEGENDARY STATUS as the Federal Reserve chairman who defeated double-digit inflation.

The transition took place at a swearingin ceremony in the East Room of the White House attended by President Reagan and Vice President Bush.

Greenspan, 61, is a widely respected economist who served as chairman of the Council of Economic Advisers under President Gerald R. Ford.

While many believe Greenspan will be as tough an inflation fighter as Voicker, he is expected to differ sharply with Voicker on the issue of banking deregulation. During his Senate confirmation hearings, Greenspan indicated he would be much more willing to reduce or eliminate regulatory restrictions than Voicker, who often clashed with the administration on this issue.

Volcker’s departure marks the end of a turbulent era at the Fed. When he was appointed chairman eight years ago, inflation was at an annual rate of 13.3 percent. Volcker instituted tight money policies that drove interest rates to levels not seen since the Civil War.

The medicine worked with inflation dropping in 1986 to a 25 year low of 1.1 percent. While hailed now as the man who liberated the country from the worst economic predicament since the Great Depression, Volcker was considered public enemy No. 1 during the steep 1982 recession.



It is easy to see why it is in the interest of the Fed to embrace the Volcker legend. For its moral is that the ALL-KNOWING, ALL-SEEING FED, reluctantly but sternly facing down a crisis, did what it had to do to kill inflation. It had the power, it had the knowledge, and, with the right person in charge, it had the will. If things ever get out of hand again – not that they’d ever tolerate that, mind you – they’d do the same thing, and whip inflation’s sorry backside once more.

Volcker’s monetary policy was dubbed “monetarism” by a media unschooled in monetary theory. True monetarists, like Keynsians, accept the legitimacy of a fiat monetary system. But unlike Keynsians, they believe there must be a strict, rule-based method of gradually and consistently increasing the money supply, in contradistinction to the herky-jerky instincts of the modern Fed. The Gold Commission contained a number of monetarists, and their influence is evident in the Majority Report. But the Fed’s monetary statistics plainly show that while Chairman Volcker was no doubt many things, a monetarist he was not.


Volcker was a magician, he adopted a tight money policy without stopping the money printing!


The Myth of the All-Powerful Fed is born


The All-Powerful Fed

See Google archive news results for "all knowing" FED

Allan Sloan – The Myth of the All-Powerful Fed – washingtonpost.com

The Myth of the All-Powerful Fed
Washington Post – Tuesday, November 1, 2005
By Allan Sloan

We all like to believe that there’s an all-knowing, all-powerful force looking after us. No, I’m not talking about organized religion and God. I’m talking about the widespread belief that AN ALL-POWERFUL FEDERAL RESERVE BOARD CONTROLS INTEREST RATES AND INFLATION and is looking out for each and every one of us.

Since President Bush nominated Ben Bernanke to become the next Alan Greenspan, we’ve heard ENDLESSLY about the Fed’s powers over the financial markets and the economy … But despite the outsized attention that any utterance from the Fed chair typically gets, the economic world isn’t controlled by one person, or even one institution.


Pretty big transformation, no?  The Federal Reserve went from a joke to being worshiped as god.




7)  Keynesian economics and its promises of PERPETUAL PROSPERITY were not working

Keynesian economics started working, deficits stopped mattering, and we’ve been spending our way to prosperity ever since.


Do Deficits Matter?


The matter is: Do deficits matter?
Milwaukee Journal – Google News Archive - Aug 28, 1983
By Jane Seaberry


Treasury report

A detailed Treasury Department report said the effects of government deficits depended on a number of economic conditions, such as whether deficits are caused by spending increases or tax cuts. If the culprit is tax cuts, such as those supply-side reductions implemented by the administration, then they could help businesses increase cash flow that could be used for investment instead of external borrowing. In this case, TAX CUT-INDUCED DEFICITS MAY CAUSE INTEREST RATES TO DECLINE, Treasury said.

… and we’re Spending Our Way To Prosperity ever since.


We’re spending our way to prosperity
Star-News – Google News Archive – Jan 24, 1998

WE ARE ENJOYING THE BEST ECONOMY WE’VE HAD IN YEARS low unemployment, high profits, trivial inflation ALL FUELED BY OUR WILLINGNESS TO GO DEEPLY INTO DEBT IN THE CAUSE OF IMMEDIATE GRATIFICATION. Consumer confidence we call it and we’re doing great, …

Actually, this entire matter is merely proof of something I’ve known for years, but have been unable to convince my wife of: Saving is a dangerous habit and should he kept under strict control. Oh, I don’t mind a little social saving, on special occasions, but that save-something-out-of-every-dollar sort of saving should be avoided at all costs. IT’S TOO ADDICTIVE.

I’ve known people who saved all their lives for retirement and put aside a pretty good pile. Then, when they finally retired, they couldn’t spend the money. They wanted to keep on saving. They’d neglected their spendthrift habits, you see.

Which has never been one of my problems. When I was a young reporter I made next to nothing. Considering I had a wife and two kids, it was less than nothing. But through all those awful years, I never failed to spend more than I made.

As a matter of fact, I generally spent in one year what I would make in the following year. When my wife would complain that we were always in debt, I would point out that our income was merely running a year behind us.



8)  The US was fighting a war on gold… and losing quite badly…

The US stops fighting the war, and gold entered into a 20 year bear market.


Us Revamps Gold Selling Methods


U.S. Revamps Gold Selling Methods To Discourage World Speculation
Schenectady Gazette – Google News Archive – Oct 16, 1979

WASTITNOTON (UPI) In an effort to discourage sperulators and strengthen the dollar, the United States Tuesday revamped its methods for selling gold from the huge U.S. stockpile.

Future sales of gold held by the Treasury “will be subject to variations in amounts and dates of offering.” an announcement said.

Under the new procedures. “auctions can be held within a few days of an announcement and the amounts to be auctioned can be varied as may be appropriate at the time,” the Treasury said.

“Basically, what we are trying to do is to provide a little more flexibility and, hopefully, to deter speculation,” said a Treasury official.

The Treasury move drew Immediate praise from one of Congress’ leading economic experts, Chairman Henry Reuss. DWis., of the House Banking Committee. who called It “a good move.”

The old policy of selling preannounced amounts on a certain day each month “plays into the hands of the gold speculators by showing all the cards once a month.” Reuss said.

Now, he said. “We’ll keep the speculators guessing and thus benefit both the dollar and world economic stability.”

Gold has soared to levels that many experts believed were unthinkable just a few weeks ago because of lack of confidence in the U S. dollar and American economic policy.


Surprise Gold Auctions Coming


‘Surprise’ gold auctions coming
Miami News – Google News Archive – Oct 17, 1979

The Treasury Department, in another move to support the dollar, says it will keep gold buyers guessing on future sales by no longer giving advance notice of the amounts or dates of its gold auctions. The average price of gold yesterday at the Treasury auction was a record high $391.98 per ounce. The decision to drop the regular monthly auctions was made to “deter speculation” in gold buying which has undermined confidence in the dollar and the ability of the United States to control inflation, a Treasury official said.



After decades of fighting gold prices, US stops regular gold sales.  Gold prices then crash and enter into a 20 year bear market in dollar terms.  Makes perfect sense.


Us Ponders Its Stockpiled Gold


U.S. Gold Ponders its Stockpiled
Palm Beach Post – Google News Archive – Sep 27, 1981
By Andrew Mollison

Why did the United States stop selling gold?

"WE NEVER SAID." a Treasury official replied. “In October of 1979 we simply announced that future sales of gold would be subject to variations in amounts and dates of offerings, held one more sale after that and KEPT OUR MOUTH SHUT FROM THEN ON."


——————————– ——————————– ——————————–

——————————– ——————————– ——————————–


9)  Faced with imminent doom… Something needed to be done…



The Dow rallies sharply




Unemployment dropped like a rock



After decades of fighting high interest, Congress phases out regulation Q (interest rate ceilings), and interest rates plummet.





In April 1979, Jimmy Carter signed an executive order which was to remove market controls from petroleum products by October 1981, so that prices would be wholly determined by the free market. Ronald Reagan signed an executive order on January 28, 1981 which enacted this reform immediately, allowing the free market to adjust oil prices in the US.




10)  The entire US financial system was nearing insolvency…

It got much, much worse, and then it magically got better.


The S&L Debacle

The disaster of the savings and loan industry during the
1980s was caused by a series of policy mistakes of unprecedented proportions—mistakes that nearly destroyed the U.S. financial system.

When inflation drove interest rates through the roof, S&Ls’ interest expenses far exceeded their interest income from home mortgages. The fatal defect of the S&Ls was fully revealed. Their industry was on the way to insolvency.

for government assistance or closing down an industry that provided most home mortgages was the political question of the day. In deadly concert, the lobbyists for the S&L industry, the Democratic congressional partisans of federal help for housing at any price, and the ideologues of the Reagan administration concocted a witch’s brew consisting of four equal portions of misguided policy.

First, the S&L industry was permitted, even urged, to move into unfamiliar territory and diversify its investments, collect higher returns on riskier projects, and EARN ITS WAY OUT of its interest rate dilemma.

Second, the regulators PAPERED OVER the industry’s bankrupt condition by substituting for traditional Generally Accepted Accounting Principles (GAAP), a new and more lax set of Regulatory Accounting Principles (RAP) designed to accomplish an accounting miracle. Insolvent S&Ls were turned into solvent ones by a number of accounting tricks, such as deferring for years losses on loans sold, and after a merger, writing up goodwill on the books chai clearly wasn’t there. The government examiners who had to apply these principles did not like them at all; they started calling them Creative Regulatory Accounting Principles (CRAP).

Third, the regulators were ordered to get off the backs of the S&Ls. As a result, not only were the investment and accounting rules relaxed, but supervision was as well. If regulators had been looking more closely at the books, the damage at least might have been controlled.

Fourth, Congress increased the amount of the government’s full faith and credit support by moving the deposit insurance limit up from $40,000 to $100,000 for each account, thereby allowing the industry to attract additional funds to lend to new get-rich-quick enterprises. This in effect made the government a full partner in a nationwide casino, first speculating mainly in real estate, later in extremely volatile mortgage securities, junk bonds, futures and options, and similar Wall Street exotica.

The Depository Institutions Deregulation and Monetary Control Act act of 1980 that increased the amount of money insured to $100,000 per account really started the ball rolling. It gave the S&Ls practically unlimited access to funds through a $100,000 “credit card” issued by Uncle Sam. Investment bankers jumped on board to divide up their clients’ money and farm it out to S&Ls offering the highest return. This system of brokered deposits, as they were called, meant that anyone with a spare million or so could spread it around in government-guaranteed packages of $100,000 to some of the riskiest institutions in the country. He could then sit back and collect the high interest payments without worrying, because the full faith and credit of Uncle Sam was behind his money. This was the exact opposite of the original intent of deposit insurance, which was to protect small savers and make them feel secure enough not to yank their money out of the bank whenever they worried about it.

High-flying speculators did not take long to realize that owning an S&L was a key to the Treasury. The S&Ls were an invitation to gamble with someone else’s money—the taxpayers of the United States. As a lawyer as well as an accountant, if I had been asked to defend these gamblers in court, I might well have used the defense of entrapment (as some did): a honey pot had been officially created that was irresistible to ordinary mortals.

The S&L crisis was born in the economic climate of the times. It was nurtured, however, in the fertile ground of politics as usual and the political mentality of “NOT ON MY WATCH.”


Although 1987 seems like a long time ago, most of us vividly recall the Savings and Loan budget debacle, which then Comptroller General Charles Bowsher deemed
"a huge scandal that was allowed to grow because of the way this town [Washington] does business." Basically, the federal government’s accounting scam went something like this. Congress created a new GSE called the Resolution Trust Corporation. It initially borrowed $50 billion from the viable parts of the S&L industry. These funds were then used to cover depositors’ losses from the bankrupt S&Ls. Because the government-backed RTC bonds were sold to the private sector, they were "off budget." And while the Treasury Department paid the interest on the bonds "on budget," the payments from the RTC to cover the S&L losses through the Federal Savings and Loan Insurance Corporation were deemed to be government revenue, which in turn artificially reduced the deficit. This simple but deceptive accounting device, like Enron’s off-balance sheet partnerships, helped Congress mechanically meet politically sensitive deficit reduction targets while at the same time increasing our national debt by the cost of the bailout (which ultimately amounted to hundreds of billions of dollars). Similarly, the U.S. government has provided trillions of dollars of off-budget loan guarantees for everything from student loans to home mortgages.


America’s Thrifts Are Facing Triple Threat In 1989


America’s thrifts are facing triple threat in 1989
Saturday Morning Deseret News – Google News Archive - Apr 4, 1989

The nation’s thrifts lost $11.1 billion in 1988, 48 percent more than 1987’s $5.8 billion loss, and face a triple economic threat in 1989, according to Alex Sheshunoff, a New York-based authority on the financial industry.

He said 1989 poses additional challenges for thrifts, the three major threats being:

Rising interest rates on deposits. High rates squeeze the interest spreads of thrifts that hold substantial amounts of fixed-rate mortgages.
A growing inventory of repossessed real estate. The industry unwillingly owns $25 5 billion — more than half of which is in Texas, with California a distant second — plus massive amounts of foreclosed property are held by government agencies.
Weakening property values. Real estate values in some regions. particularly the Northeast. appear to be starting to deteriorate.

“Those are three tough challenges.” said Sheshunoff, “It’s like a three-ring circus. The S&L executive has to juggle, tame lions, and walk a tightrope, all at the same time.”

The good news, he said, is that they’re working with a net. The bad news is that its woven out of U.S. tax dollars.

“Moreover, the thrift crisis, even though concentrated in the Southwest, has shaken public trust in thrifts and those who regulate them.”


The Six Trillion Dollar Debt Iceberg; A Review of the Government’s Risk Exposure


June 28, 1990
The Six Trillion Dollar Debt Iceberg; A Review of the Government’s Risk Exposure
by Utt, Ronald

In a congressional floor speech last spring decrying the cost of the savings and loan (S&L) bailout, now estimated at between $150 billion and $300 billion, Representative Major Owens, the New York Democrat, declared that he believed there had never been a single item in peacetime that cost the government so much money. Owens raised an intriguing question, and research into federal budget history reveals that he was right. Only World War II cost more than the S&L bailout, at least in nominal dollars. But an examination of the finances of other government-backed agencies indicates that the bailout may be just the tip of a fiscal iceberg about to strike the American taxpayer. The total financial obligation of agencies underwritten by the federal government is now SOME $5.8 TRILLION AND MUCH OF THAT OBLIGATION IS IN BAD SHAPE.

The S&L disaster represents a staggering breakdown of government, and the hidden costs to Americans likely will turn out to be several times the amount that the hapless taxpayer is scheduled to pay directly in extra taxes. It will take years to unravel what really happened and why. But one thing is clear: the governments mega-billion dollar commitment to guarantee the deposits of the savings and loans insured by the Federal Savings and Loan In surance Corporation (FSLIC) was grossly mismanaged, and these perverse incentives offered by the insurance program led to the wholesale looting of hundreds of thrift institutions.

WORSENING DAILY. As the S&L bailout legislation went through Congress most lawmakers TRIED TO CONVINCE AMERICANS THAT THE CRISIS WAS JUST AN ISOLATED INCIDENT, however costly, and that the vast bulk of the government credit programs are well-managed and pose little risk to the taxpayer. While taxpayers may wish for this to be so, a cursory examination of the federal governments vast credit empire actually reveals repeated instances of huge financial risks THAT ARE WORSENING BY THE DAY. In fact, the $958.9 billion in S&L deposits insured by the FSLIC at the end of 1989 represents just a small fraction of the financial liabilities the federal government has assumed through its many direct lending, loan guarantee, and insurance programs. The $4.2 billion loss at the Federal Housing Administration revealed in May 1989 in a General-Accounting Office.(GAO) audit and the Office of Management and Budgets Om) projection that the losses continue, are just among the latest hint of a vast liability that could land in the lap of taxpayers.  The governments total risk exposure of nearly $6 trillion dollars is more than twice the national debt held by the public and more than five times the annual federal budget.

Comprehensive Effort Needed. A number of these programs already are encountering serious financial problems.
Others could join them over the next year, depending upon how the economy performs. Like the FSLIC, some of these programs require immediate attention to stanch enormous losses and limit potential future claims on the taxpayer. Unfortunately, no such comprehensive effort is under way in Congress or the White House. Worse still, to the extent that credit-related legislation is being considered by Congress some of it would make the situation even worse.


The vast system of federal credit programs, with their $5.8 trillion in outstanding obligations is in serious trouble. It costs-the taxpayers billions of dollars a year in bailouts, defaults, and unneeded subsidies. Beyond these direct costs to American taxpayers is a host of indirect costs due to the disruption they cause to U.S. financial markets and the country’s ability to deploy its capital resources in an efficient and productive fashion.

Facing the Fact.
This national embarrassment and potential catastrophe must be brought under control as swiftly as possible through an Omnibus Credit Reform Bill that makes fundamental changes in the way these programs are structured and operated. Many of the reforms that should be contained in such a measure already have the support of the Administration and in Congress. Unfortunately, the reform approach to this date has been piecemeal, and thus misses the opportunity to achieve comprehensive reform, dealing with problems before they worsen. Congress must at last face up to the fact that THE SAVINGS AND LOAN CRISIS, AND THE OTHER EMERGING PROBLEMS associated with federal credit and guarantee programs, ARE NOT ISOLATED AND UNCONNECTED. Rather, THEY INDICATE SYSTEMIC FLAWS. The solution is system-wide reform.


Why Is the U.S. Banking Industry in Trouble? Business Cycles, Loan Losses, and Deposit Insurance
Lawrence H. White

We learned from the U.S. thrift-industry debacle that congress peopie and regulators HAVE INCENTIVES TO MASK AND DENY THE SIZE OF INSOLVENCIES among deposit-taking institutions when they first arise. Rather than promptly resolve the widespread insolvencies that existed among thrifts in 1981, the authorities chose to revise the regulatory accounting rules, to practice “forbearance,” and to gamble that economically insolvent thrifts might climb back into the black (Eisenbeis 1990, 19—20). As it turned out, the cost of resolving the problem grew…

The Industry’s and the FDIC’s Troubles Are Large

a sense of déjà vu accompanied news reports, beginning in late 1990, that the Federal Deposit Insurance Corporation, the agency that now guarantees both thrift and bank deposits, would soon run out of money without taxpayer assistance.

An authoritative study of the FDIC’s condition appeared in a report by James R. Barth, R. Dan Brumbaugh, and Robert E. Litan, dated December 1990, … concluded that the FDIC at the end of 1990 appeared to be where the FSLIC was in the mid-1980s, “without sufficient resources to pay for its expected caseload of failed depositories.”

A major source of concern is that larger banks have begun to appear on the FDIC’s list of “problem banks.” The list numbered 975 banks at the midpoint of 1991, slightly fewer than in the immediately preceding years, but the aggregate assets of problem banks had increased.

In fact SOME OF THE VERY LARGEST U.S. BANKS ARE TEETERING. The Economist commented in December 1990: “Nobody knows just how much rubbish U.S. banks have on their books, or how many loans might become rubbish if a recession deepens. Among the banks that fail may be prominent money-centres.”6 Barth, Brumbaugh, and Litan (1990, 13) commented that as of the end of 1990 “most” of the nation’s largest banks were “on—or conceivably over—the edge of insolvency…. Many of these banks not only currently have weak balance sheets by any reasonable standard, but they also are highly exposed to additional deterioration in their capital positions from their significant involvement in high-risk lending. …

FDIC call reports show that the large banks (those with more than $10 billion in assets) as a size class HAVE THE WEAKEST LOAN PORTFOLIOS.

With the FDIC running out of cash, there is a great danger that the agency is neglecting to close insolvent banks, just as the FSLIC neglected insolvent thrifts for years. "ZOMBIE" INSTITUTIONS (economically “dead” but still operating) MAY BE AFOOT, piling up obligations that will eventually be laid at the doorstep of taxpayers. …


Then, it all magically got better!

The whole “insolvent financial system” thing disappeared in the early 1990s…

Bank Failures Still Minimal Compared to Early 1990s but FDIC Watch List is Growing

…and look how little money it took to fix the problem!



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The government’s self-interest




1) MEDIA BLACKOUTS:  The government’s self-interest




MEDIA BLACKOUT:  The profits of the “war on drugs”


Crackdown On Drugs Profitable


Crackdown on drugs profitable
Bangor Daily News – Google News Archive - Oct 19, 1982

(AP) — The illegal drug industry, ranked just behind Exxon in sales last year, is losing millions of dollars to police that confiscate property and cash in a nationwide

Between Jan. 1, 1981. and Sept 30. 1982, US. Customs agents confiscated 699 boats, 503 cars and trucks and 271 planes worth a total of $57.5 million during drug raids in 11 Southeastern states.

About 90 percent of those seizures occurred in South Florida, Customs officials in Miami said.

Most of the seized goods nave been or will be sold at public auctions, said Kitty Pryor. a spokeswoman for the customs agency. THE PROCEEDS ARE THEN TUNNELED INTO THE U.S. GOVERNMENT’S GENERAL TREASURY.



Restraining Property Seizures


Restraining Property Seizures
Published: December 17, 1993

Property seizures can be valuable supplements to law enforcement.
By confiscating drug dealers’ houses, cars, yachts and other property, Federal agents can disable their enterprises and deprive them of ill-gotten gains. But as the Supreme Court is beginning to suspect, such seizures can be abused to raise revenues.

Explaining the need for legal safeguards for seizures and forfeitures the other day, the high court cited a 1990 Justice Department memorandum to its far-flung agents.
"We must significantly increase production to reach our budget target," the memo said. "Failure to achieve the $470 million projection would expose the Department’s forfeiture program to criticism and undermine confidence in our budget projections."

the Government has a strong economic motive to grab a person’s house for budget-balancing purposes, the courts need to be vigilant to insure fairness, the Court said. …

The decision was perhaps only a temporary victory for James Daniel Good, a small-time drug violator
whose home in Hawaii was seized four years after he pleaded guilty to a marijuana charge and served a year in prison.

In recent cases the increasingly cautious justices have
blocked the seizure of a house from an owner if she can prove she was unaware that drug money was used to buy the home. They also served notice that some seizures can be so valuable compared with the crime as to violate the Eighth Amendment’s ban on excessive fines.


Google Archive News results for "forfeiture program" drug





… Based on twelve months of covert observation from within narcotics enforcement agencies, Drug Enforcement’s Double-Edged Sword: An Assessment of Asset Forfeiture Programs described forfeiture as a "dysfunctional policy" that forces law enforcement agencies to subordinate justice to profit.

The Double-Edged Sword undercover researcher observed agencies abandon investigations of suspects they knew were trafficking large amounts of contraband simply because the case was not profitable. Agents routinely targeted low level dealers rather than big traffickers, who are better able to insulate themselves and their assets from reverse sting operations.  The report states: "EFFICIENCY IS MEASURED BY THE AMOUNT OF MONEY SEIZED RATHER THAN IMPACT ON DRUG TRAFFICKING."

… More importantly, THE NARCOTICS UNITS STUDIED PREFERRED SEIZING CASH intended for purchase of drugs supplied by the police, RATHER THAN CONFISCATING DRUGS ALREADY ON THE STREET. When asked why a search warrant would not be served on a suspect known to have resale quantities of contraband, one officer responded: 

"Because that would just give us a bunch of dope and the hassle of having to book him (the suspect). WE’VE GOT ALL THE DOPE WE NEED IN THE PROPERTY ROOM, just stick to rounding up cases with big money and stay away from warrants."  

In one case an agency instructed the researcher to observe the suspect’s daily transactions reselling a large shipment of cocaine so that officers could postpone making the bust UNTIL AFTER THE MAJORITY OF THE DRUG SHIPMENT WAS CONVERTED TO CASH. This case was only one of many in which THE GOAL WAS PROFIT RATHER THAN REDUCING THE SUPPLY OF DRUGS REACHING THE STREET. 


IMPLICATIONS:  Once you understand how the government profits from the "war on drugs", the fact that the US is helping grow 90% of the world heroin makes a lot more sense.  After all profits from forfeiture programs are proportional to amount of available drug money to be seized.  Healthy consistent profits from these forfeiture programs are therefore depended on a steady inflow of hard drugs like cocaine and heroin.


So if the US eradicated Afghanistan’s poppies and created a worldwide shortage of heroin, it would create severe budgetary problems.  Worse still, the dropping revenue at forfeiture programs would be seen as a failure on the war on drugs.


After all, the more property the government seizes, the more it is hurting drug dealers.  Wouldn’t you be outraged if you learned the government was going easy on drug pushers by seizing half as much property  as it did before?






MEDIA BLACKOUT:  How the US government benefits from dollarization


Because of its implications, this is one of the biggest and most important media blackout.

Basically, there are two ENORMOUS BENEFITS for the US when a foreign country is dollarized.  The dollarization of Iraq clearly illustrate the clearly illustrate the first way the US profits from the process.  The US sends Iraq pieces of paper in exchange for billions in oil revenue.


History Commons reports that The Federal Reserve’s cash shipments to Iraq.


April 2003: Federal Reserve Sends CPA $20 Million in Cash
At the request of the Coalition Provisional Authority, the Federal Reserve Bank sends the CPA $20 million in $1, $5, and $10 bills. The money is drawn from the Development Fund for Iraq (DFI) and special US Treasury accounts containing revenues from sales of Iraqi oil exports, surplus dollars from the UN-run oil-for-food program, and frozen assets that belonged to the government of Saddam Hussein. This is the first of several shipments, TOTALING SOME $12 BILLION, that will be made over the next 14 months. [US Congress, 2/6/2007 ]


December 12, 2003: Federal Reserve Sends CPA $1.5 Billion in Cash

“Brick” of $400,000 in U.S. Currency (4,000 $100 bills)
“Brick” of $400,000 in U.S. Currency (4,000 $100 bills)
[Source: Federal Reserve Bank of New York]

At the request of the Coalition Provisional Authority, the Federal Reserve Bank sends the CPA $1.5 billion in cash.  … [US Congress, 2/6/2007 ; Reuters, 2/7/2007]


June 22, 2004: Federal Reserve Sends CPA $2.4 Billion in Cash

Pallets of US Currency Arriving in Iraq
Pallets of US Currency Arriving in Iraq
[Source: US Congress. House Committee on Government Reform]

At the request of the Coalition Provisional Authority, the Federal Reserve Bank sends the CPA $2.4 billion in cash. This is the largest cash pay-out of US currency in Federal Reserve history. This shipment is quickly followed by another large shipment three days later. …


June 25, 2004: Federal Reserve Sends CPA $1.6 Billion in Cash; Last Shipment to CPA

Cash shipments to Iraq by month
Cash shipments to Iraq by month [Source: US Congress. House Committee on Government Reform] (click image to enlarge)

The US Federal Reserve sends the Coalition Provisional Authority (CPA) in Baghdad $1.6 billion on giant pallets aboard military C-130 cargo planes. This is the last of a series of several shipments that began in April 2003 (see April 2003). The money was drawn from the Development Fund for Iraq (DFI) and special US Treasury accounts containing revenues from sales of Iraqi oil exports, surplus dollars from the UN-run oil-for-food program, and frozen assets that belonged to the government of Saddam Hussein. Most shipments were under $1 billion, except for this one and two others, one in December, and one just three days before (see December 12, 2003 and June 22, 2004). TOGETHER THESE SHIPMENTS AMOUNT TO $12 BILLION, SOME 363 TONS OF PALLETED CASH.

IMPLICATIONS:  The benefits to the US are the same even when dollarization is indirect.  For example, if large quantity cash flows into Latin American countries experiencing hyperinflation, the US can print money to replace that cash without causing inflation.



  The government’s incentive to lie about the dollar’s strength.

Gold Data: Lesson in Artful Dodging

Gold Data: Lesson in Artful Dodging
Wall Street Journal - Aug 1, 1967

WASHINGTON — "In this business, you have to choose between lying to people or scaring them to death.” The speaker isn’t a doctor or a nuclear bomb expert but a Johnson Administration official coping with the balance of payments problem. His choice is usually clear: Don’t let the public, or more pertinently the nervous bankers abroad who could cash in their dollars and touch off a run on the nation’s gold supply, KNOW THE TRUTH

AII the shadowy activities revolve around the persistent payments deficit—which has as foreigners acquired more dollars than they returned to the U.S. … With $29 billion of foreign owned dollars stacked up as potential claims on $13.2 billion gold stock figure, they have ample reason for what’s left as best unsaid…

Since international high finance is so subtle, … the dilemma rarely has to be resolved with the outright lie either. Instead the Administration is EVER MORE SHREWDLY GUARDING THE DOLLAR’S VALUE abroad and intelligence about it through little known techniques that range from DOUBLECOUNTING GOLD BARS to TINKERING WITH OF OTHERWISE ROUTINE GOVERNMENT SECURITIES. The result is a web of statistics that mask almost as much they display about the dollar outflow.

Some of this double counting [of gold] dates back to the 1950s when the IMF made gold investments in interest earning short-term Treasury securities. The fund can reclaim this $800 million gold whenever it wants. And 5228 million more is gold the U.S sold outright for dollars in the last year or so to smaller nations so they in turn could make their mandatory quota payments to the IMF. Swiftly before these show up in Government data, the IMF restored this gold to the Treasury as a special deposit. The purpose was clearly by both parties. Mitigation of the original sales effect on the U.S. statistics.

Only a discreet footnote following in Government statistical publications brings these double countings to light. But because they were openly announced when they were initiated, Washington officials contend they aren’t really deceptive

Happily for officials anxious to put the best face on the figures, there’s no simple standard for deciding just what is a dollar going into foreign hands and thus swelling the payments deficit. Few of them are greenbacks carried out of the country the basic measure comes from major banks reports of how foreigners checking accounts went up or down during a reporting period. These dollar deposits are considered liquid liabilities. Also counting as liquid liabilities are the dollars foreigners invest in most Treasury securities regardless of their maturity and dollars they invest in other Federal securities and bank certificates of deposit having original maturities of less than one year. But the self-imposed accounting standards that class these as liquid liabilities are sterner than those in most other nations, so Administration men argue that it’s not dishonest to bend events around them to America’s best advantage. Thus it was that, because a single day’s added maturity would make these short-term investments count as a favorable dollar inflow, a recent a 400 million debenture offer by the Federal National Mortgage Association appeared with maturity of one year and two days. If foreigners should chance to buy some it would help rather than hurt the payments position.

Privately foreign financial officials are delighted to see Walther Lederer, the Department’s chief payments economist, persistently pointing out that there’s no real advantage for the U.S. in getting foreigners to put dollars in securities that are just barely over an arbitrary line.  The Treasury is very clever but WALTHER SPOILS IT BY BEING SO HONEST one embassy aide snickers.

foreign purchases of such securities aren’t being left entirely to chance. Other governments are frequently coaxed to rechannel their dollar investments into the most statistically soothing forms. It’s partly because the Treasury can quietly arrange such investments at the last minute before a balance of payments reporting period ends of course that forecasting the deficits has become so much less attractive to private predictors. In the first 1967 quarter for instance it was largely a spate of foreign official purchases that spared the Government from having to report a deficit close to $900 million instead the figure was roughly $540 million…

It’s not all arm-twisting a State Department official insists arguing that interest rates on short-term Federal securities and bank certificates of deposit have been high enough to inspire such purchases voluntarily. Even so, the growing awareness in Washington that pressures are applied makes the topic a sensitive one.

Discreet Dissembling

The discreet dissembling is squarely in the public interest officials are convinced. TO GIVE THE WORLD A GLIMPSE AT RAW PAYMENTS DEFICIT FIGURES FOR JUST A SINGLE MONTH OR AT ONE DAY’S ACTUAL GOLD OUTFLOW THEY ARGUE COULD PROVE DISASTROUS. While U.S. authorities might take an immensely adverse number calmly knowing a big inflow is on the way, such a figure might so frighten outsiders that GREATER EXODUS OF DOLLARS WOULD RESULT.

Even a prominent private financier who helped create the Government’s dollar defenses confesses that he can’t tell anymore what our balance of payments trend is. Since he has left Washington ho says the dodges have become even more artful.  The Treasury’s credibility problem is becoming terrible…


IMPLICATIONS:  Nothing has changed.  In fact, the government’s incentive to lie is INFINITELY stronger today.







MEDIA BLACKOUT:  How the federal government itself benefits from inflation


Lawrence H. White from the Cato Institute explains the consequences of politicizing the money supply.


What must be recognized as fundamental is HOW THE FEDERAL GOVERNMENT ITSELF BENEFITS FROM INFLATION. The federal government gains from monetary expansion and accompanying rising prices in at least three ways. (1) Inflation under-anticipated by bond-holders erodes the real value of the government’s interest-bearing debt. Wealth is transferred from holders of government debt directly to the government, the largest debtor in the economy. (2) Inflation swells federal tax receipts due to "bracket creep." Income taxes are progressive with respect to nominal income, and deductions are nominally defined. Also, inflationary appreciation of business inventories is taxed as profit. The real burden of taxes increases, yet Congress is able to declare a moderating "tax cut." (3) Most importantly, expansion of the money stock itself levies a "tax" on holders of money. By issuing fresh batches of money, the federal government can obtain real resources in exchange. … [(4) inflation pushes up the value of hard assets (homes, cars, etc…) creating taxable capital gains.]

The Process of Inflation

the Fed’s open-market operations are usually tailored to support the Treasury’s funding needs ON A MONTH-TO-MONTH BASIS.

The Temptation of Easy Money

That the illusory boom comes first, and the painful readjustment period of the recession comes later, helps explain why a shortsighted monetary authority is tempted by easy money policy. The temporary dip in output and employment associated with the monetary restraint necessary to cool inflation unfortunately comes before any permanent gain. A temporary bulge in unemployment appears well before price stability and productive reintegration can be established. Past expansionary impulses continue to snake their way through the economy, pushing up prices. Restraint reveals the distortions and dislocations due to the previous inflation, and popular analysis mistakenly attributes these troubles to the restraint RATHER THAN TO THE PREVIOUS INFLATION. Since the Fed (as Mr. Dooley once said of another political body, the Supreme Court) follows the election returns, shortsightedness is just what we should expect of our monetary authority.

the Federal Reserve Board’s pursuit of inflationary policy is THE PREDICTABLE RESULT of the incentive structure surrounding them AS AN ARM OF THE FEDERAL GOVERNMENT. We cannot hope to end inflation – and with it the business cycle — until we reform our monetary institutions so that the stock of money is no longer subject to manipulation by politicians. As long as the federal government enjoys central control of the money supply, we will find money being turned to political ends. …

The bald fact about the Fed is that, like any state-sponsored central bank, it is by nature and origin a parasitic institution. Central banks typically originated as wartime inflationary finance schemes, the Bank of England being the premier example. They exist today primarily TO SERVICE GOVERNMENTS’ APPETITES FOR SPENDING.


IMPLICATIONS:  If you could print money, wouldn’t you?







MEDIA BLACKOUT:  The Treasury’s motive to bail out banks where it has billions on deposit.


Tax Revenues Glut Coffers at Treasury


Tax Revenues Glut Coffers at Treasury

Washington Post - May 2, 1998

By John M. Berry

On Wednesday Treasury had $42 billion on deposit with the Federal Reserve and $58 billion in so-called tax and loan accounts at commercial banks around the country. The total on deposit with the banks was about $15 billion more than Treasury has ever had in the past.


New York Times – December 13, 1990
By JEFF GERTH, Special to The New York Times

WASHINGTON, Dec. 12 — The Treasury Department routinely deposits in commercial banks Federal funds from personal and corporate taxes as well as operating cash. Hundreds of financial institutions act as Federal depositories through these "tax and loan accounts," which the Treasury says are "blindly" placed.

Critics Talk of Risk

The case has raised questions among legislators and financial experts about the safety of the procedures of the Government for investing public money and about its role in aiding troubled financial institutions.

These critics say the action is risky. Because the Federal money is uninsured, THE GOVERNMENT COULD BE EXPOSED TO LOSSES IF THE BANK FAILED.


The media blackout can best be seen by comparing Google Archive News results for "tax and loan" treasury and the chart of showing number of bank and S&L failures in the 1980.  Notice how the media stopped mentioning the treasury’s "tax and loan accounts" (the government’s self-interest in bailing out certain banks) right during the years where it would have been most relevant (when a large number of S&Ls and banks were failing).






IMPLICATIONS:  Since the government can’t insure its own deposits, the billions of dollars the US treasury has on deposit around the country are unprotected in the event of bank failure.  It therefore has strong financial interest in bailing out the banks where it has large deposits in order to avoid losses.


This leads to the question: when the treasury bails out a particular bank while letting others fail, is it bailing out the bank… OR ITSELFWhy doesn’t the press ever mention this exposure?





MEDIA BLACKOUT:  The government’s hate of inflation (and love of deflation).


This is really simple:

A)  Fighting the threat of inflation means highly unpopular tax hikes and agonizing budget cuts.

B)  Fighting the threat of deflation means highly popular tax cuts, all kinds of pork-barrel spending, increases in benefits, etc…


In other words, politicians HATE fighting the “war on inflation”, but LOVE fighting the “war on deflation.”


IMPLICATIONS:  Washington’s hatred of inflation extends to anything—besides their own money printing—which fuels inflation (ie: speculating against the dollar, gold buying, etc).  Similarly, Washington’s love of deflation extends to anything which puts downward pressure on prices (ie: illegal immigration, dollarization of foreign countries, etc).





MEDIA BLACKOUT:  How the government benefits from illegal immigration.


Study Says Aliens Pay Taxes But Not Reap Social Benefits


Study says aliens pay taxes but not reap social benefits
Beaver Country Times – Google News Archive – Nov 20, 1975

The nation’s estimated eight million illegal aliens contribute far more to the American taxpaying system than they reap in government social benefits, according to a Labor Department study.

The report nonetheless confirmed assumptions that
illegals depress wages in low-level jobs and cause a harmful swell of cheap labor during times of high unemployment.

Dunlop, who will discuss the alien problem with Mexican officials next week, said he was surprised that
77 PER CENT of the sampled illegal aliens paid Social Security taxes and 73 PER CENT paid federal income taxes.

“The involvement of illegals in taxpaying is much more pronounced than their use of tax-supported systems,” the report said.


Tax Day Hits Illegal Aliens, Too


Tax day hits illegal aliens, too
Free-Lance Star – Google News Archive – Apr 13, 2003
By Donnie Johnston

Every employer in this country is required to deduct and send to the government such payroll taxes as prescribed by law. NO WORKER — not even a Mexican migrant worker— IS IMMUNE.

Illegal aliens pay federal income tax, Social Security tax and Medicare tax. It doesn’t make any difference that those taxes are being withheld under a false Social Security number, they are still withheld and sent to the U.S. Treasury.

Since the workers are illegal,
they can’t file federal tax returns so THE GOVERNMENT JUST KEEPS ANY OVERPAYMENT.

What’s more,
these people will never have an opportunity to draw Social Security. So, as far as they are concerned, THAT MONEY IS JUST THROWN AWAY.

the employer has to file a Social Security match so THAT MONEY IS, in effect, A FREE GIFT TO THE GOVERNMENT, TOO.

Since Social Security benefits are taken almost directly from payroll taxes,
all these illegal aliens we keep bad-mouthing are actually helping support those now receiving Social Security checks. They tire helping pay Medicare bills, too.”

The taxing of illegal aliens doesn’t stop there, either. Every time these people buy anything from a store, they pay Virginia sales tax and when they eat at a restaurant, they pay a meals tax just like you and me.
State income taxes—none of which they will get back—are also deducted from their wages.

So what do these people get for their taxes? Well, NOT MUCH. Most Mexicans are teenagers or young men in their 20s who have no families or children in school. About the most illegal aliens get for their tax dollar is a hard time.


This column is neither in support nor in protest of illegal aliens. Rather, it is to point out that those who gripe that
these people are not contributing anything to this country DON’T KNOW WHAT THEY ARE TALKING ABOUT.

… illegal aliens pay taxes just like the rest of us.

They just don’t get refunds and qualify for few—if any—services.

Google archive news results for "illegal aliens" paying "social security" tax


IMPLICATIONS:  Illegal aliens benefit the government in three ways:


1)  They depress wages in low-level jobs, which puts downward pressure on inflation! (The government’s hated number #1 enemy.)

2)  While they depress wages, illegal aliens increase tax revenues, because illegal aliens don’t get the tax refunds an American citizen would have gotten for the same job.

3)  They cost the government next to nothing.




MEDIA BLACKOUT:  The government’s exposure to the housing market

As can be seen in the chart below, the government has developed a huge exposure to home mortgage debt.





As of 2009, the federal government guarantees or owns 8 trillion dollars of mortgage debt.

(in billions)

MBS Exposure

Fannie Mae


Freddie Mac




Ginnie Mae


Federal MBS Exposure


Since, at the end of 2009, about $11.7 trillion in mortgage debt was outstanding, the federal government now owns or guarantees 69% of all mortgages.

Federal MBS Exposure


mortgage debt outstanding


Percent of mortgage debt guaranteed or owned by federal government





The federal government has a ridiculous amount of exposure to mortgage debt.

How did the federal government owns or guarantees 70% all mortgages?

The answer is simple.  Presidential administrations (like Bush and Obama) have faced two choices with regards to their housing policies:

A)  Increase involvement in mortgage/housing markets, decreasing the immediate short term cost (but increasing long term costs).
B)  Reversing involvement in mortgage/housing markets, causing housing prices to crash and defaults to skyrocket, leading to massive taxpayer losses due to the government’s existing exposure mortgage debt.

Every administration for the last 50 years has chosen answer A.

IMPLICATIONS:  Federal involvement in housing was NEVER about “home ownership”, but always bailing about bailing out financial institutions and, more importantly, itself!  As the government’s exposure to the mortgage/housing market has grown, the incentive to prop up housing prices has only grown.

The real purpose of housing legislations can be seen as clear as day in their names:

The Emergency Home Finance Act of 1970
The Emergency Housing Act of 1975
The Emergency Housing Assistance Act of 1983
The Emergency Housing Assistance Act of 1988

Is home ownership an emergency?  No.






MEDIA BLACKOUT:  The government’s self-interest as one of the biggest seller of toxic debt



The Government is one of the biggest seller of toxic debt.  And no, I am referring not to treasury securities (which have become increasingly toxic themselves with the US’s deteriorating finances), but to the real problem assets: unsecured defaulted consumer/corporate loans. The lack of collateral to restore the debt holders makes this debt "toxic."


Lewis William Seidman, in his book Full Faith and Credit: The Great S & L Debacle and Other Washington Sagas

Explains how the government, through the Resolution Trust Corporation (RTC), held the World’s Largest Fire Sale.


The Resolution Trust Corporation:
The World’s Largest Fire Sale

The Resolution Trust Corporation (RTC) took its name from a financial term: to “resolve,” which in bankruptcy means to dispose of the firm’s assets and settle things once and for all.
Like most goals of government, this proved easier to promulgate than to perform. This resolution was unprecedented not only in the variety but the size of the assets. At its peak it would deal with about $400 BILLION WORTH OF ASSETS FROM FAILED INSTITUTIONS. About half of this historic figure was in home mortgages, and other loans, most of which were good, solid loans that yielded regular interest payments. But the other half of the S&Ls’ investments WERE THE PROBLEM. They averaged only 60 to 70 percent of their face value, and some raw land was worth only about 10 percent of the money loaned on it.

The RTC was set up by the Financial institutions Reform, Recovery and Enforcement Act (FIRREA), signed into law on August 9, 1989.

The RTC was supposed to contain, manage, and “resolve” failed savings associations that had been insured by the FSLIC before the law’s enactment. The RTC was directed to sell off the assets of the S&Ls at the maximum value it could realize in the market, and at the same time it was also directed to minimize the impact of dumping all this already dubious real estate, junk bonds, stocks, and other questionable financial paper on a glutted market. … The goals set for the RTC would be forever in conflict, but Congress went away happy…






The Los Angeles Times reports that the RTC was one of the nation’s biggest holders of junk bonds.

U.S. Gets Creative to Sell Junk Bonds

The RTC is already ONE OF THE NATION’S BIGGEST HOLDERS OF JUNK BONDS, thanks to regulatory takeovers of institutions such as Imperial Savings of San Diego and CenTrust Bank in Miami. And if it takes control of troubled Columbia Savings & Loan Assn. of Beverly Hills, as many expect, its junk portfolio WILL DOUBLE OVERNIGHT.






IMPLICATIONS:  As the largest seller of toxic assets, the government’s self-interest diverges sharply from that of the public, especially on issues like the credit ratings of toxic securities.









MEDIA BLACKOUT:  The Government’s incentive to participate in financial fraud.

Here is the chart of treasury yields from June 2009, at the time the story below was written.  Rising yields means the value of treasuries are falling.

Stewart Thomson explains THE HORROR confronting bond traders in June 2009.

THE HORROR, Bond traders are white with terror
by Stewart Thomson

I want to talk about the bond market today as it relates to gold. And take you into the very real mind of a very real bond trader. Looking at a bond and gold chart is all very interesting if you like watching ivory tower movies. I do. But movies are not the whole picture.
Experiencing the market thru the eyes of a real professional bond trader gives you a sensation of reality, in this case a most horrifying reality, that no chart can give you. I’m going to take you into the mind of a major bond trader who is a very good friend of mine.

What’s happening in bond land? The latest US govt bond auction was for $110 billion. Two years ago the average monthly bond auction total was $5 billion, $10 billion, numbers like that. The US govt finances its debt with bonds. A $2 trillion deficit means $2 trillion in new bonds needs to be issued. Approx. $200 billion a month.

I want to take you inside the mind of a primary dealer. These are the approx. 20 dealers that have contracts with the US govt to market their bonds. The way the deal works in the govt’s mind is: "You buy our bonds and sell them. You can short t-bonds going into the auction and bag a nice profit for yourself. But if you don’t sell the bonds to your clients, guess who owns them? You do! If you don’t like it, no more primary dealing for you, got it? And maybe we aren’t so keen to hand over anymore bailout money or allow fraud accounting of your OTC derivatives. So play ball, OR WE TAKE YOU OUT."

I spent two hours yesterday meeting in person with a very good friend of mine
who is retired as the largest govt bond trader in Canada for one of the primary dealers. He still manages $1.5 billion as a side gig. His minimum trade is $5 million. He looks like a pitbull and uses 4 letter words like Mr. Bernanke uses a greenback photocopier. He carefully detailed to me the horrors that began roaring thru the bond market, HORRORS THAT ARE GROWING, since the shocking $110 billion US govt bond auction was announced for this week.

The bottom line is:
THERE ISN’T ENOUGH MONEY TO SOAK UP ALL THE GOVT PAPER SCREAMING DOWN THE PIPE. The $300 billion in total that Mr. Bernanke committed to buy the bonds over multiple auctions, is a drop in the bucket. IT’S NOT ENOUGH.

There is a daily competition for money in the world’s bond markets. The US govt bond is the King Daddy of those markets.
The primary dealers will do WHATEVER IT TAKES to sell those bonds. The primary dealers also carry tremendous power against the govt. Let’s have a listen to their response to the Gman’s "it’s my way or the highway". Listen carefully. "How would you like it, Mr. Gman, if we announced that "sorry, we can’t find buyers for your triple A rated toilet paper, WE’RE GOING TO ANNOUNCE TO YOUR PUBLIC THAT YOU DEFAULTED. Let’s see how you do when we cut your credit cards up. You tell us what to do? Wrong. Go ahead, take away our primary dealerships. WE’RE ALL STANDING TOGETHER ON THIS. We give the orders, not you. Got it?"

What might those orders be? One order could be:
"Your $300 billion commitment to buy T-bonds ain’t gonna cut it. Try $3 trillion. Now get to your greenback photocopier start button and start pushing it. We’ll tell you when to stop."

While that action may be in the pipeline, as of today the ACTIONS taken in the bond market by the players are what is important. And
those actions, believe it or not, are to buy bonds. Money is starting to come out of general equities, aka the stock market, and into bonds. Money is not coming out of bonds, it’s going in. THIS IS WHAT THE CHARTISTS DON’T UNDERSTAND. Money isn’t just trickling in, it’s pouring in. But it’s not enough to meet the govt’s skyrocketing demand for money!

The bond market auction was this week. Again, I want you to FEEL what the bond traders are feeling. THEY ARE WHITE WITH TERROR. They aren’t looking at some chart in internet candyland, they know there isn’t enough money to buy all the govt bonds.

… Let me repeat:
money IS not just moving into bonds now, it is POURING in. But… THAT MONEY IS NOT ENOUGH TO SOAK UP ALL THE BONDS THE GOVT IS ISSUING.


IMPLICATIONS:  The fate of the US government and primary dealers are both linked to the continued health of the US treasury market.  The government has a MASSASSIVE self-interest for not only allowing, but participating in financial fraud with primary dealers to keep the US treasury market from collapsing.









MEDIA BLACKOUT:  How the government benefits from the “conspiracy theories” rhetoric.


Any government fraud involves more than one person and is therefore a conspiracy.


Government Fraud = Conspiracy


Any allegations of government fraud is therefore, by default, a “conspiracy theory”.


Allegations of Government Fraud = Conspiracy Theories


Today, the mainstream stream media is not willing to cover conspiracy theories, which means by extension that all allegations of fraud, even those backed by a mountain of evidence, will be ignored.


A mainstream media not willing to cover conspiracy theories = A mainstream media not willing to cover allegations of government fraud



IMPLICATIONS:  Thanks to today’s rhetoric about "conspiracy theories", the government is virtually insulated from all accountability thanks to a press and public that instinctively reject any allegation of government fraud.  So thorough is the mental roadblock against "conspiracy theories" that most people will be turned off by the mere act of questioning inconsistencies in the official stories, let alone making an accusation of fraud.



Answer:  Because there is so much government fraud:

Government Fraud Rampant, Gao Says

Government Fraud Rampant, GAO Says
Deseret News – Google News Archive – Feb 28, 1980

The head of the General Accounting Office says fraud abuse and waste totaling billions of dollars from bribery to thievery exists throughout the government, but not enough is being done to slop it.


Unsurprisingly, the amount of alleged government frauds ("conspiracy theories") corresponds with the actual level of government fraud.

Google archive news results for "government fraud"



Google archive news results for "conspiracy theories"


There will always be outlandish accusations of government fraud ("conspiracy theories"), but there will also ALWAYS BE REAL ACCUSATIONS OF GOVERNMENT FRAUD.  The job of the press is to sort out between the two which is which, RATHER THAT SIMPLY IGNORE ALL ALLEGATIONS OF GOVERNMENT FRAUD.


How can a media that is unwilling to consider ANY allegations of government fraud be considered free?







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