According to no less a source than Forbes magazine, a U.S. default is no longer a question of if. It’s when. In a July 23 article, Forbes’ Addison Wiggin warned readers not to get caught holding U.S. dollars when the United States government defaults — again.
During a 2½ year period starting at the end of 2007, the Federal Reserve provided more than $16 trillion in secret bailouts to banks and other companies around the world, according to a government audit of some of the U.S. central bank’s operations.
Much of the Fed's largesse was lavished on banks in Europe (such as Barclays, pictured) and Asia, the audit revealed. More than $3 trillion, for example, went to financial institutions in just five European countries. Trillions more flowed toward some of the biggest banks in America. Institutions from Brazil and Mexico to South Korea and Canada also benefited.
The 266-page report, produced by Congress’s non-partisan investigative service known as the Government Accountability Office (GAO), has already sparked intense outrage since its release on July 21.
When public debt abounds, politicians look to slippery ways to keep buying votes with tax dollars while reassuring skittish markets that everything is okay. America, of course, faces a deficit showdown driven, largely, by the explosion in federal expenditures during the reign of Obama. The glut of mandated money (currency backed by the “full faith and credit of the United States” — and nothing else) has produced predictable economic behavior.
People invest in what they believe will be safe. Real estate, historically, has been a good investment for most Americans. But when the federal government pushes and bribes big lenders to make imprudent loans, and the predictable avalanche of defaults occurs, then an artificial glut of housing drives down the market price and strips hard-working families of the investment that had been the principal economic asset of the family.
Money is anything that is commonly accepted as a medium of exchange, with government interjecting itself into the equation by designating certain notes as "legal tender." Historically, mediums of exchange have included gold and silver as well as other forms of what might be called commodity money. Yet, you cannot pay your electric bill or your mortgage with a gold bar or even gold coins. You have to sell your gold for cash in order to use it to pay for things. Of course, at one time gold coins were used as money, but they aren’t today. And there was a time when paper money was backed by gold or silver. Paper money was then redeemable in gold and silver at a fixed price. Those of us who are seniors remember the time when dollars were silver certificates. Now they are backed by the “full faith and credit of the government.” But with government borrowing trillions of dollars in order to spend trillions of dollars, that “full faith and credit” is about to go down the drain.
Article One, Section 8 of the U.S. Constitution states that Congress shall have the power “To coin Money, regulate the Value thereof, and of Foreign coin, and fix the Standard of Weights and Measures.”
With the “shutting down” of the federal government looming, Republican and Democratic lawmakers on Capitol Hill are scrambling to hit their respective marks on the stage of public attention. Reportedly, Republicans in the Senate are unanimously behind passage of a Balanced Budget Amendment, while Democrats in both houses are clamoring to raise the debt ceiling, lest Social Security checks not be mailed. The performances are predictable and the soliloquies are so well-rehearsed and so familiar to critic and citizen alike that most of the dramatized sound and fury goes unnoticed and little of the legitimate signal breaks through the noise of rhetoric.
As has become his custom, however, there is one man in Washington consistently breaking the fourth wall, going off script, and speaking directly to the people.
What news could possibly draw a smile from the normally sphinx-faced Chairman of the Federal Reserve, Ben Bernanke? The news that his longtime adversary on Capitol Hill, Ron Paul, is retiring from Congress. But it’s doubtful that Bernanke will have many other light moments in the months to come.
The man once credited with staving off a second Great Depression persists as dogmatically as ever in his faith in the Federal Reserve money machine’s power to cure, or at least to palliate, all economic ills, in spite of mounting evidence that — as Ron Paul and others have been insisting — the Fed’s inflationary “solution” to the economic crisis has only made things worse.
In an effort to plug leaks at the Federal Reserve, the U.S.'s central bank issued a statement yesterday that members of the Federal Open Market Committee “will refrain” from sharing insider information “with any individual, firm, or organization who could profit financially from…that information.”
Since the establishment of the Federal Reserve in 1913, its operations and decision-making processes have been deliberately opaque. In the 1990s the minutes of its policy meetings weren’t made public for five years. And with then-Chairman Alan Greenspan’s deliberate obfuscation of Fed policy — called “FedSpeak” — an entire cottage industry sprang up trying to interpret the Fed’s machinations and likely next moves on monetary policy.
There is a theme to news stories about the PIGS (Portugal, Ireland, Greece, and Spain) in the last few years: Rosy projections always turn out worse than expected. So it's of little surprise that Reuters announced on July 11 that the recession in Greece is worse than the “experts” had predicted.
The interim budget, upon which so much of the bailout of the nation rested, greatly understated the budget gap. (The underestimation of the budget shortfall over an earlier projection was by almost one-third.)
Europe’s slow-motion economic collapse continues apace as Eurozone governments and banks continue to wring their hands over what to do to postpone the inevitable Greek default. And now there’s a new wrinkle: Italy, whose level of sovereign indebtedness relative to GDP is second only to that of Greece, has suddenly appeared on investors’ radar screens. If Italy — the second largest economy in the Eurozone — goes the way of Greece, Ireland, and Portugal, there will not be enough money in Europe’s rapidly-dwindling rescue fund (the European Financial Stability Facility or EFSF) to effect a bailout.
The impasse over Greece is bad enough. Several countries in the European Union, including the Netherlands and Germany, expect private holders — large European banks — of Greek bonds to share some of the burden for the next Greek bailout, reckoned at some €110 billion. But European megabanks, given the precedents set with numerous recent taxpayer-funded bailouts on both sides of the Atlantic, are refusing to consider losing any of their own money. And all sides are finally awakening to the realization that a Greek default in the form of some kind of debt restructuring is inevitable. As Julian Toyer and Dan Flynn of Reuters report:
Americans know the term "stagflation"; the decline in economic activity accompanied by an artificially inflated money supply is what Europe is presently experiencing. On Thursday, European Central Bank President Jean-Claude Trichet announced that the ECB had raised its interest rates 1.5 points and suggested that this action, intended to contract the money supply, might be pursued more aggressively in the future — even though the so-called "PIGS" nations of Europe (Portugal, Ireland, Greece, and Spain) need influxes of money in order to prevent default.
While Trichet recognized that this hike in interest rates might slow down the world economy, he stated that controlling inflation remained the bank’s most important task at present. He hinted that another raise might be in store in future months, noting that the bank would “monitor very closely” price developments, which has been a code for suggesting that interest rates would not be raised the next month. “Our monetary policy stance remains accommodative," he assured. "It is essential [that] recent price developments do not give rise to broad based inflation pressures over the medium term.” Marc Ostvald, an market strategist at Monument Securities, advised: "A further quarter point rate hike probably in October or November still appears to be the central scenario."