Ponzi Financial Relationship Between US and China

While doing laundry and surfing the web today (I don’t normally work on Fridays) I came across an article that likens the US – China financial relationship to the Ponzi scheme perpetrated by fraudster Bernie Madoff, who was recently sentenced to 150 years in prison.

What’s so Ponzi about the Chinese-U.S. relationship? Basically everything. Look at it this way:After a currency debacle in 1998 left its economy in tatters, Beijing decided to radically restructure its financial relationship with the West. Policymakers pegged the value of China’s currency to the dollar, which had the effect of keeping it artificially low.

Over the past decade, Americans were able to outspend their incomes by easily rolling their debts forward through serial home refinancing. The situation was never ideal, but it worked as long as the value of their collateral — their homes — kept rising.

Fed to Print $300 Billion

Yahoo Finance reports:

The U.S. Federal Reserve on Wednesday, in a surprise move, said it will buy up to $300 billion worth of longer-term U.S. government debt over the next six months …

This is outright money printing, and in time will devalue the dollar and any assets held in dollars.

Update 3/20/2009:  Here’s Richard Russel’s take on this from his 3/19 post (subscription web site, well worth it IMHO)

Russell Comment — They’re calling it “The Rambo Fed.” Bernanke is not fooling around any longer. He’s playing all his cards. He’s going to put a floor under housing and boost asset prices in an all-out attack on the bear market. Bernanke wants to drive mortgage rates down and refinance housing at 3-4%. On the news, the dollar swooned, the Euro surged, the long T-bond exploded higher by six points, and the yield on the ten-year Treasury bond sank to 1.51%. Whew, what a day and what an announcement.

Late comment – We’ve now entered into the what I call “the land of unintended consequences.”

Here’s Peter Schiff’s take. Who’s he? Just someone who predicted the financial crisis about a year before it happened!

There is an old adage on Wall Street that no one rings a bell at major market tops or bottoms. That may be true in normal times, but as many have noticed, we are now completely through the looking glass. In this parallel reality, Ben Bernanke has just rung the loudest bell ever heard in the foreign exchange and government debt markets.

While nearly every facet of America’s economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch.

This week the Federal Reserve finally made clear what should have been obvious for some time – the only weapon that the Fed is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.

In its statement, the Fed announced its intention to purchase an additional $1 trillion worth of U.S. treasury and agency debt. The purchases, of course, will be made with money created out of thin air through the Fed’s printing presses.

Now that the Fed has recklessly shown its hand, the mad dash to get out of Treasuries and dollars should not be far off. The more the Fed prints to buy bonds the less the dollar is worth.

His conclusion:

With such a policy in place, America has now become a banana republic. It won’t be too long before our living standards reflect our new status. Got Gold?

Obama + Socialism = Return to Barbarism

In a great article – but not a simple read – economist Lew Rockwell explains Mises’s illustration of the failure of socialism and how Obama is taking the US down the path to barbarism. Worth the time to read. Following are some excerpts:

We find ourselves facing the horror of what has always been the Achilles’ Heel of the left wing: its abysmal ignorance of economic science. The ideological tendency has gone from Keynesianism to outright socialism in a matter of a few weeks.

bad policy leads to bad results that are addressed through bad policy, and so on, straight down the fast track to serfdom

Socialism crushes human rights, builds the state, impinges on the liberty of conscience, and breeds social, cultural, and economic degeneration.

Ludwig von Mises in 1920, however, added something special and new to the critique of socialism. He said that socialism in all its forms cannot accommodate any economic development beyond the hunter-gatherer stage.

No socialist has ever been able to provide an answer to Mises’s devastating point.

Mises’s illustration of the failure of socialism provides a fantastic means to discover what is right about markets and wrong about all forms of collectivized economic planning. It shows what happens when you nationalize banks and credit.

And look: it’s not as if socialism is a new idea. It was tried in the 20^th century. It produced economic stagnation and despair. In its purest form, it extinguished more than one hundred million people.

Take this seriously: it is where the Obama tendency is leading us.

The Math Formula that Destroyed the (Financial) World

Wired Magazine reports that a formula devised by mathematician David X. Li to evaluate risk was used by all the major financial players – who are now broke and begging for government handouts (a.k.a. welfare), is responsible for the current financial melt down.

True or False? Hmm … I’ll go with False. I’d say the root cause was herding behavior – they all did the same thing at the same time. And when reality emerged, all that “wealth” was revealed to an hallucination such as  “House prices always go up”. Until they don’t.

Ron Paul on the Serial Bailouts and the Federal Reserve

http://www.lewrockwell.com/paul/paul497.html Recall that Ron Paul predicted the current financial crisis years ago.

The updated total bailout commitments add up to over $8 trillion now. This translates into a monetary base increase of 75 percent over the last two months. This money does not come from some rainy day fund tucked away in the budget somewhere – it is created from thin air, and devalues every dollar in circulation. Dumping money on an economy, as they have been doing, is not the same as dumping wealth. In fact, it has quite the opposite effect.

It is unnatural and dangerous for paper to be considered as precious as a precious metal. Our fiat currency system is crumbling and coming to an end, as all fiat currencies eventually do.