When A Nation Monetizes Its Own Debt

Monetization is the process of combining paper and ink and calling it legal tender. In short, when a nation monetizes its own debt, it is essentially paying its bills by printing its own money to do so. From the looks of things, I suspect the Federal Reserve is working the printing presses at warp speed.

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How long does it take to print $1 trillion? And, when will we see the reemergence of the 1,000 dollar bill?

Historically speaking, the Federal Reserve began to monetize our nation’s debt back in World War II, so in a sense, this is nothing new. However, with net federal debt quickly approaching the $10 trillion level, the temptation to simply erase this debt through the printing of money seems irresistible.

Daniel L. Thornton describes debt monetization in his 1984 paper thus:

“Monetizing the debt means money growth induced by attempts to moderate the effects of rapidly growing government debt on interest rates. By definition, open market operations buying and selling government securities in the money and capital markets) represent debt monetization, that is, the replacement of government debt with money. “

Monetizing The Debt Article

Thornton goes on to say that technically speaking, “the phrase “monetizing the debt” means money growth in excess of that required to achieve some policy objective that is induced by rapid growth in the federal debt.” So, the question remains, will the Federal Reserve grow the money supply in excess of the federal debt requirements, and how will all of this impact interest rates and inflation?

What are the consequences of monetizing the debt?

Out of control inflation is known as “hyperinflation.” Basically, hyperinflation occurs when a nation’s currency losses its value through a change in the supply and demand relationship.

When the Federal Reserve prints trillions of dollars to repay debt, this is a process of increasing the supply of money. At the same time, other nations and investors recognize that we are printing money, making it less attractive as an investment in the forex capital markets, thus reducing the demand.

Anytime you increase the supply of a currency while reducing its demand, you decrease the value of that currency. This leads almost inevitably to hyperinflation.

The threat of hyperinflation associated with monetization of debt is what alerted the Tidal Wave of Rage to this subject.

Hyperinflation ruins wealth and will destroy any savings you have managed to acquire. Germany in the 1920s is the best-known example of inflation run a muck. During a period known as the Viemar Republic, the German government began to monetize its debt to pay for World War I.

Around 1914 one German Mark was worth about 25 cents. If you had managed to save 10,000 marks, you had a decent nest egg for the future. Fast forward to 1920. Your 10,000 mark nest egg will not pay for a single match to light your fireplace. Years of hard work and saving have evaporated literally overnight. People race to the grocer at the end of each workday with wheel barrows full of trillion mark bills to buy food before tomorrow’s prices kick in.

Hyperinflation will mean the destruction of everything you have ever worked for. And is reason enough to join the tidal wave of rage against reckless government spending.

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Mark To Market Accounting Exists For A Reason

Mark to market accounting exists for a simple reason: to reflect a fair market value of held assets and provide a standard mechanism for investors to analyze the value and/or potential of a given financial instrument or institution. Removal of the mark to market accounting practice will increase the difficulty of assessing the true value of a given investment, while temporarily inflating the perception of financial soundness in our financial system.

Recently the practice of mark to market accounting has gained noteriety as a cause for capiltalization risks at banks as home values have fallen dramatically. While some argue the end of mark to market accounting will enable banks to reset the value of their portfolios, others argue that mark to market accounting protects investors’ interests by accurately stating current market values.

As usual, when trying to get my arms around a subject I begin my search for the truth at Wikipedia. According to Wiki, mark-to-market accounting (also known as fair value accounting) “refers to the accounting standards of assigning a value to a position held in a financial instrument based on the current fair market price for the instrument or similar instruments. Fair value accounting has been a part of US Generally Accepted Accounting Principles (GAAP) since the early 1990s.”

Wikipedia Mark To Market Entry

Rather than getting wrapped up in the complicated world of interest rate swaps and over the counter derivatives, think of mark to market accounting in terms of your home value and how it may impact your bank.

For example, your home’s value is determined by the sales of comparable properties in your community, as well as the cost to replace the home. An estimated value of say $360,000 in 2007, may well be closer to $200,000 today. In mark to market accounting, the bank must reflect the current market value of your home, rather than the original value when your home loan was originated.

This worked in the bank’s favor for years as real estate values rose at 10-20% per annum. Banks were only too happy to use mark to market accounting to their advantage in the heady days of 2001-2007, and bundled these rapidly appreciating assets into tradeable securities. However, now that the tide has turned and property values are plunging, the same generally accepted accounting practice is scorned as onerous and unfair. Suddenly, all those packaged mortgage backed securities are worth a lot less than they were two years ago, and financial institutions who banked on trading mortgages like starry eyed day traders have been left holding a rather stinky bag.

So now they want the rules changed. It’s like a child’s game where as long as his team is winning, the rules are fine; take away his lead, however, and he begins to whine that the game is fixed and lobbies for moving the goalposts.

So why should you care about mark to market accounting?

In my opinion mark to market accounting practices are important to maintaining realisitc value projections in the financial system. If you take this practice away, you are essentially appointing the fox to guard the henhouse. As the president of a bank, my first response to relaxing mark to market accounting would be to reset the value of my home loan portfolio. I’m no banking expert, but this sounds like a way to deceive investors, as well as the bank regulators, into believing your institution is financially sound, while the opposite may be closer to the truth.

James Kwak sums it up well in his comment, “it seems like the banking industry is taking advantage of the confusion to push through a change it wants, because it will make it easier for banks to massage their balance sheets and harder for investors to see what is really going on.”

James Kwak Commentary

In my opinion, the last thing we need in this economy is less confidence in the system. Relaxing the mark to market rules would be both convenient and expedient for banks, but I fear this conveneince would come at consumer, investor, and ultimately, taxpayer expense.

Campaign for Libery Viral Video

Campaign for Liberty’s very own Steve Bierfeldt has become an unexpected Internet sensation -- and the latest target of over-reaching federal government agents.

The Campaign for Liberty is a grassroots organization headed by Ron Paul. Its stated mission is to “promote and defend the great American principles of individual liberty, constitutional government, sound money, free markets, and a noninterventionist foreign policy, by means of educational and political activity.”

The Campaign for Liberty claims that over 100,000 Americans have joined the organization since its inception in June, 2008.

During a visit to the St. Louis Campaign for Liberty regional conference, Steve was detained at the Lambert-St. Louis Airport by TSA officials for carrying around $5,000 worth of checks he had received as donations from Campaign for Liberty supporters.

It seems checks pose a threat to airline security. As the video below illustrates, the police and TSA authorities refused to inform Steve of his legal rights, and threatened legal action against him if he did not cooperate.

According to a report from the Campaign for Liberty, “Throughout the interrogation, Steve remained polite but resolute and declined to answer the invasive questions without an adequate explanation from these federal and local agents as to why they needed to be answered. Without telling Steve what law he was accused of breaking, they continued their harassment.”

Is this government control gone wild?

Watch the video and decide for yourself.

Washington Mutual Phoenix Rising

Just when you thought Washington Mutual (Stock Symbol: WAMUQ.PK) had gone the way of the passenger pigeon, it makes a comeback.

I'm focusing on Washington Mutual in the Tidal Wave of Rage blog because its story is representative of our government gone wild. Learn about the fiasco surrounding the WaMu takeover, and its pending lawsuit against the FDIC, and you'll see what I mean.

Fraud May Be The Root Of Our Economic Woes

When you think of bank failures and the current economic woes of this nation, keep in mind that much of it stems from blatant mortgage fraud and greed.

During the past six months the U.S. banking industry has been brought to its knees in a series of bank failures and revelations of risky exposure to literally trillions of dollars worth of sub-prime mortgages, credit default swaps, and other exotic derivative based investments that extend far beyond the normal banking business of collecting deposits and making consumer loans. Leading the charge into these dangerous waters are, in my opinion, name brand banks like Citigroup, Wells Fargo, and JP Morgan Chase, among others (Stock Symbol: C, WFC, and JPM respectively).

While these practices sound abhorrent, it should also be noted that they were conducted in apparent accord with the law. The practice of making risky investments outside the normal confines of bank operations appears brilliant when all is well, and criminal when it is not.

In my opinion, bank executives erred when they forgot to listen to Tom Peters when he advised companies to “stick to your knitting,” in his famous book of the 80s, In Search of Excellence. Now it is time to pay the piper, and sadly, the U.S. consumer and taxpayer is footing the bill--to the tune of over $8.5 trillion so far.

So far it looks like the bailout of the U.S. economy has racked up to around $8.5 trillion. See this link for a complete breakdown of how your money is being spent:

How To Spend $8.5 Trillion


I don’t normally watch Bill Moyers on PBS, but this week he had an amazing interview with banking expert and former regulator involved with revealing the S&L crisis of the 1980’s, Mr. William K. Black.

According to Mr. Black, much of the banking and economic woes we face today can be placed at the feet of bank executives who were driven more by short term greed than long term concern for the banking industry.

Here’s how it works. If you have ever applied for a loan at a bank, you know that the higher your credit risk, the higher interest rate you will pay. During the real estate boom of 2001-2007, bank executives began to realize with the federal government’s desperate attempts to find a home for every citizen, regardless of income or credit, banks could capitalize on the incredible bonanza of sub-prime mortgages.

Sure, the risks were high, but at the time banks coffers were swelling with profits.

This translates into huge bonuses for banking executives. And for a few years everything looked good. But, just like any commonplace Ponzi scheme, eventually the house of cards falls down upon itself—crushing everybody in its path. Make no mistake, much of our current economic problems stem from outright fraud.

Banks enjoy a privileged position in our society, and as such, the fat cats who own and control our currency will not suffer. No, that neighborhood we all know and love is restricted to the little guy who works for a living. Like it or not, the major culprits in this so-called banking Ponzi scheme will survive, and perhaps thrive, while the ranks of the unemployed struggle with their downsized dreams, meager pension plans, and growing tax burden.

Do yourself a favor. Don't take my word for it. Get the facts first hand. You can access the entire Bill Moyer interview right here: Bill Moyers

And in case that isn't convincing enough, check out this article from Yahoo Finance:

http://finance.yahoo.com/tech-ticker/article/225823/Mortgage-Fraud-Epidemic-How-the-FBI-Blew-It-and-Why-There's-No-'Perp-Walks'?tickers=JPM,BAC,XLF,MHP,MCO,WB,FAS?sec=topStories&pos=9&asset=TBD&ccode=TBD
.

Pension Fund Losses Will Cost You Over $1 Trillion

Just when you thought it was safe to retire and perhaps live off that pension fund you contributed to your entire working life, you discover your pension fund is penniless.

Or at least down by 50%.

I remember several years ago when Orange County, California officials came under fire for mismanaging its county funds, leading to bankruptcy. Sadly, what was shocking news at the time has become commonplace in today’s economy.

When did it become excusable for government officials to place pension funds in risky investments like credit default swaps and countless other high risk derivative based investments? I don’t manage my personal financial future that way, so what gives?

The bottom line is that mid-level government bureaucrats with minimal to moderate knowledge of fund management and global investment vehicles have taken a cavalier approach to managing public funds. It’s easy to throw a billion bucks into a risky investment when the money is not yours, and you know there is no accountability.

Somewhere in the inner sanctums of government, from the county to the federal level, twitter happy, tax dole spouting wannabes knew they had only to press the taxpayer emergency button for salvation, in the form of increased sales and income taxes. But I’m here to tell you, the party is over.

Taxpayers across this country are sick and tired of being the end all panacea for every problem our government creates. If you care to learn more about this infuriating subject, hop over to the article on pension fund losses at Yahoo Finance.

As for me, I need to take a break. I think I’ll go swim the Kern River.

Washington Mutual Battles Injustice

“You may think you know the truth about the Washington Mutual collapse,” but according to information published on WaMu Truth you may be surprised to learn the facts are vastly different than those espoused by the mainstream media.

Tidal Wave of Rage is taking a stand with the shareholders of Washington Mutual, currently trading under stock market symbol wamuq.pk. Why?

The Washington Mutual takeover is symbolic of everything that has gone wrong in this country over the past six months.

According to claims made in a lawsuit against the FDIC, the Washington Mutual Holding Company, WMI, Inc., asserts the Office of Thrift Supervision placed a solvent bank into FDIC receivership and improperly assumed title to valuable WMI assets. The entire 39 page claim can be read at: WMI vs FDIC

The following text has been extracted from the WaMu Truth website.

Washington Mutual had $307B in assets, $188B in deposits, 2239 branches, 4,932 owned and branded ATMs, and 43,198 employees at the time of seizure. They had multiple subsidiaries that were sold as well. The FDIC brokered the “sale” for $1.888 Billion. Washington Mutual began after the “Seattle Fire” of 1889 was seized on its 119th Birthday.

The FDIC decided that $1.888 Billion was a just and fair price for the bank. It is interesting to note that the auction offer presented by the FDIC permitted banks to bid $0.0 for the bank, and also totally disregarded the stockholders and bondholders, as well as other liabilities of the bank.

The FDIC required only the administrative costs for the transaction, and held the bank for only a few hours before ownership was transferred to JPMorgan. Washington Mutual Bank was forced to file Chapter 11 the following day. They lost $26 Billion in stock of WAMU (WMB) due to the bank seizure.

The recent declines in the stock market are well known, but few people realize that WaMu may have been the straw that broke the camel's back. This seizure impacted not just Washington Mutual Inc investors, but all types of investments in all US stock markets. Shock waves have cascaded throughout stock markets worldwide.

This leads one to question whether Washington Mutual Bank should have been seized that September evening. The sale of WAMU, for a fraction of its worth, was conducted without regard for the bondholders or shareholders of the bank, much less for the effects to the confidence in our stock markets and our government in general.

There’s more to this story than the media is telling you, and in this blogger’s opinion, the most powerful force in a free society is the voice of an informed electorate.

Tidal Wave of Rage invites you to read and consider the merits of this case for yourself.