Financial topics

[Reality Check]

I think it was an important debate two years ago, but since the system was backstopped by government rather than letting deflation take hold, the important debate is whether the entire worldwide financial system will collapse in a heap, similar to the collapses of the Roman Empire or the Middle Ages (the collapse of the Bardi in 1346 three years after the City of Florence backstopped it, which led to the complete collapse and depopulation of Europe). Trouble is, today our delivery systems have no means to facilitate exchange in anything other than electronic currencies and if US government finances suddenly blow up, then how will that be inflation or deflation? What we are more likely looking at here is the end of the Modern world, similar but yet different to how the Ancient and Medieval worlds ended. A prerequisite to that happening is that few can identify the possibility and thus no measures are taken to prevent it.

I agree that is one probability. The centralization of power and wealth in this country through automation and federal law is an undeniable fact.

But are all the crooks that incompetent that they can not adapt those automated systems to their own use?

One thing I have not mentioned, because I have not researched it enough to have an opinion on what it might mean, is the fact the Federal Reserve system has just completed a multi-year project to re-vamp the way it's electronic accounting system works. Very similar to the capability to geometrically expand IP number capacity of the internet by converting from IP version 4 to IP version 6. In effect transforming what we called that ABA numbers into something more a kin to individual account numbers. What they appear to be using it for so far is setting up multiple American Banking Association ( ABA ) bank numbers, where only one existed before.

[Higgenbotham]

One partial scenario. The US Treasury bonds start to fall in price. As the Fed and the banks are holding US Treasury bonds on their balance sheets, the value then further declines to unacceptable levels that may trigger balance sheet problems according to the Stress Tests. As well, the banks have the 401Ks and IRAs in their custody. Before any bank runs start, on a Friday afternoon, the US government announces an "Emergency Federal Reserve, Bank and Retirement Security Reorganization Holiday". The banks are closed until further notice. The US government announces that as part of a plan to provide more secure retirements that all 401Ks and IRAs will be converted to US government guaranteed annuities with an above market fixed interest rate. The assets in the 401Ks and IRAs are placed on the balance sheets of the Fed and the banks and the 401Ks and IRAs are credited at the market value at Friday's close. The US Treasury bonds held by the Fed and the banks are converted to the US government guaranteed annuities and put into the 401Ks and IRAs according to the amount of credits. Next, the assets that were placed on the Fed's balance sheet are zeroed out against the excess reserves and those assets are then transferred back to the banks. The operation starts on Friday afternoon and is complete by Monday morning. This doesn't save the system but it is used as an intermediate step to delay the inevitable.

[Reality Check]

"Emergency Federal Reserve, Bank and Retirement Security Reorganization Holiday". The banks are closed until further notice. The US government announces that as part of a plan to provide more secure retirements that all 401Ks and IRAs will be converted to US government guaranteed annuities with an above market fixed interest rate.

From a Generation Dynamics point of view that scenario has a number of pluses.

It screws the Baby Boomers so the Xers will love it. Have to love the above market interest rate twist.

It just kicks the can down the road, but does not fix anything.

Couple of issues though, it lacks a fall guy, the FED and the U.S. Government initiated it so they own it.

Mechanics and/or benefit of doing it are problematic. Very complex inter-relationships between insurance companies, stock brokers and banks to deal with.
Many of those assets will already be private insurance company annuities of one type or another. Banks may liquidate stocks they did not choose to buy. Could blow up in everyone's face and the politicians and the FED would be blamed. Biggest benefit - a clean steal of the Retirement money to clean up the toxic assets does not exist.

Also the Xers will never inherited that money, and the Politicians will get blamed for that.

It will also result in people no longer participating in retirement plans.

On the other hand, it will also increase tax revenues because that income not going into tax sheltered retirement plans will be taxed.

Biggest problem though is it decreases, rather than increases, the power of federal government politicians. The crisis being kicked down the road at the Baby Boomers expense is a crisis the politicians created: too much worthless federal government debt.

[Higgenbotham]

Couple of issues though, it lacks a fall guy, the FED and the U.S. Government initiated it so they own it.

Lacking a fall guy is defnitely a problem. Unless there is a war coincident with that scenario, there will have to be a fall guy. Problem is, if there is a war, it's likely that inflation will eat away at that fixed annuity income stream. The scenario does give the advantage that $6 trillion in US Treasury debt can be wiped off the books in exchange for some fraction of that in some other category. They can probably find a way to fudge the accounting to say that does not really equate to being in $6 trillion worth of debt, and the ratings agencies and the bond market may play along. Bond prices may go back up and the game may continue for awhile longer. One trick may be that the fixed payments stop and the account is wiped out when the person dies. They may only convert the accounts of people over a certain age, give them 3.5%, and figure they will live for an average 15 years or something like that. Even that could reduce the stated debt by $3 trillion and buy them another couple years.

[Reality Check]

The new "safe electronic dollars" option has another benefit to the U.S. government.

Incomes in the United States are going to continue to fall. A tax collection system based primarily on a progressive income tax is going to be a negative from the governments point of view.

By having a two currency system the government can take a cut when goods are bought overseas and again when goods are shipped overseas. And it would not be a tariff so it would not violate the free trade agreements.

[Reality Check]

There is another problem with any kick the can down the road scenario that involves putting assets buried deep inside pension plans, 401Ks, and IRAs on the market.

The debt bubble is real.

Any action that causes toxic assets that are currently hidden to be exposed and traded has potential unintended consequences.

I have come to believe the buying of Mortgage Backed Securities with printed money is more about avoiding the exposure of toxic assets, in the form of private label, privately insured Mortgage Backed Securities, and the forced sale of those toxic assets at true market value, than it is about stimulating the economy.

A cynic might believe printing money is just about buying time until the pre-packaged bankruptcy plans are fully in place for all financial institutions.

[Reality Check]

A scenario that blames the private corporations for the loss of retirement income also makes Social Security and the federal government look like the good guys.

[Higgenbotham]

Banks may liquidate stocks they did not choose to buy.

There is another problem with any kick the can down the road scenario that involves putting assets buried deep inside pension plans, 401Ks, and IRAs on the market.

Definitely a problem, as well as the fact that the banks are then stuck with their own money market funds with noplace to dump them off.

I don't see any good options left to kick the can. You also mentioned the MBS purchases. In my opinion, that was not a wise move on their part. I saw a survey on the SF Federal Reserve Facebook page about the MBS purchases. The top survey answer by far given in response to the Fed decision on September 13 to buy the $40 billion per month was that the decision was a bad move, and I would have to think it is the Fed's own peer group who is reading their Facebook page, not so much people like us.

[Reality Check]

You also mentioned the MBS purchases. In my opinion, that was not a wise move on their part. I saw a survey on the SF Federal Reserve Facebook page about the MBS purchases. The top survey answer by far given in response to the Fed decision on September 13 to buy the $40 billion per month was that the decision was a bad move, and I would have to think it is the Fed's own peer group who is reading their Facebook page, not so much people like us.

The entire way that announcement was made was weird. The lack of weasel words. The unlimited commitment to continue as "long as required". I smelled fear.

Fear of some data, or fear of some threat. Some people are still holding on to those Toxic Assets, and they may have reached the point where they believed they could absorb dumping them. The FED may have needed to convince them they were better off sticking with the slow and steady approach to transferring the under lying properties to U.S. government insured Mortgaged Back Securities and getting out from under them without significant loses.

[Higgenbotham]

It may not have been the response they were hoping for.

One day after the Federal Reserve announced a new open-ended mortgage-bond buying program–a third round of what’s known as quantitative easing, or QE3–the Federal Reserve Bank of San Francisco posed a question on its Facebook page: “What effect do you think QE3 will have on the U.S. economy?”

The results, posted Monday, were not enthusiastic. Though the U.S. stock market had rallied after the Fed’s decision, with the Dow Jones Industrial Average closing Friday at its highest level since December 2007, Facebook responders were decidedly less optimistic.

“Long term, disastrous” was the top response, garnering 355 votes as of early afternoon Monday. The 12 next most popular answers were only slightly less morose, with responders rating the Fed’s move as “negative,” a sarcastic “thanks for $5 gas” and 26 votes to fire Fed Chairman Ben Bernanke.

http://blogs.wsj.com/economics/2012/09/ ... -facebook/

http://www.againstcronycapitalism.org/2 ... -the-poll/