December 23, 2013 - 100th Anniversary of the FED, a Day of Celebrations or the Day of Reckoning?

The Consequences of FED’s policies for 2014 and beyond.

By Matthias Chang – Future FastForward, December 16, 2013

December 23, 2013 central banks the world over, without exceptions will celebrate the 100th Anniversary of the establishment of the FED, which was founded on the 23rd December, 1913. Without the FED and the network of central banks, the global fiat money system would not have such a remarkable sustained existence.

We hold the view that the impact of FED’s policies specifically with regard to the global fiat money system will be acutely felt in 2014 and final judgment on the consequences arising thereof will be delivered no later than the fall of 2015.

The raging debate within the ranks of the global financial elites – specifically within the corridors of the FED, BOE, ECB and BOJ on the correctness of Quantitative Easing to salvage the global fiat money system will be settled one way or another by the fall of 2015. This is a given!

Japan is playing its final gambit with Abenomics [1] and Janet Yellen will have two years to further tinker the system and to prepare the ground when the global financial elites would be compelled to acknowledge the failure or success of their policies.

One has only to read between the lines of the present debate that the priority facing policy-makers is a “Catch-22 Choice” of determining which should have priority:

1.    Preserving the US Dollar Global Reserve Currency, or
2.    Sustaining the Global Fiat Money System.

Though in many ways the two are inter-connected, we hold the view that only one can be saved and sustained in the short to mid-term with all the attendant consequences. But, in the final analysis the entire financial architecture must be reconfigured.

This reflects the sharp internal contradictions within the financial ruling class of the world - that of (1) the financial ruling class that insist on maintaining the dominance of the US Dollar as the global reserve currency and therefore should have priority as against (2) the financial ruling class that maintains that the Global Fiat Money System must be defended at all costs as the dollar supremacy can be substituted by another currency (or a basket of currencies) digital or otherwise.

This is a broad demarcation of the contending forces, though it can be said with some justification that the Anglo-American financial ruling class would lean towards the continued dominance of the US Dollar, as the Bretton Woods  System was jettisoned in favour of the present Fiat Money System. Hence, a new system can replace the present system as long as the US Dollar remains the linchpin of the system. The rationale is founded on the historical basis that the US Dollar, post World War 2 replaced the then Pound Sterling as the undisputed global reserve currency. From a gold-backed dollar to the present fiat dollar, the US Dollar was supreme and must remain supreme to further the agenda of the “New American Century” and the necessity for “Full-Spectrum Dominance”. [2]

The counter-argument is that the Fiat Money System should have priority for it is the system that will determine what currency (or basket of currencies) would be the instrument for dominance. To be specific, we refer to the system (be it commodity based or pure fiat system) whereby the central banks (led by a chosen “Leading Central Bank” [3]) would have the sole and undisputed authority to create money out of thin air, digitally or otherwise. The foundational argument for preserving this power more than any other privilege is that the 0.01 per cent of the global financial elites would be wiped out and deprived of their stranglehold on their financial and political power, if the system collapses .

Contrary to the dictum of Mao Zedong, that “political power grows out of the barrel of a gun”, imperial history demonstrates otherwise. Political power “flows from the spigots of money”, and the monetary spigots are the global networks of central banks.

Let me quote from a central banker:

“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take away from them the power to create money and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."

Baron Josiah Charles Stamp
Director, Bank of England

Modern banking (the system) rests of two Pillars – (1) The Too Big To Fail (TBTF) Banks and the Shadow Money-lenders, backstopped by (2) the Global Central Banks, presently “led” by the FED but under the overall co-ordination of the Bank for International Settlements (BIS). [4]

Given the above scenario, it is no surprise that the financial elites contending for the priority of preserving the Fiat Money System as opposed to those contending for the supremacy of the dollar have held sway in the present debate.

This is obvious and the first indication that such was the case was the intervention by the FED in the financial debacle caused by the total collapse of the Long Term Credit Management hedge fund in 1998. It was felt at the material time that if no rescue was mounted the entire global banking system would have collapsed as a result of counter-party risks snowballing to a global-contagion risk affecting all banks.

This template was followed to the letter when the financial tsunami hit the global banking system in 2008. The FED wasted no time in pumping US$ Trillions into the banking system (with money created out of thin air) to save US and foreign banks (i.e. the global TBTF banks) from immediate bankruptcy. All caution was thrown to the wind in that there was no hesitancy by this group of policy-makers to save the system in priority of and at the risk of the inevitable consequences of the massive debasement of the US Dollar – the threat to the confidence and supremacy of the US Dollar as the global reserve currency.

Whether you belong to and or support the first group or the second group of policy-makers would be dependent on your understanding of the underlying flaws and structural weaknesses of the respective contentions in the present debate.

Regardless of the myriad issues and contentions put forward by the opposing school of thought, there is one common denominator which has been ignored (consciously or otherwise) by both sets of policy-makers. By way of analogy, a drug addict or an alcoholic will always deny that he is addicted to drugs or alcohol!

The common denominator we are referring to is the “Debt Drug”, the most toxic of all drugs, for this drug annihilates not individuals or communities but destroys the entire wealth of nations.

The destruction is that much more catastrophic because the entire financial edifice is an inverted pyramid, the entire global financial system is kept in balance on the stability of a pin-head. Yes, it is that fragile!

The “pin-head” of stability is the ability of central banks, to be precise, the FED to control interest rates.

Please pause and re-read the above sentence again and take time to ponder before continuing reading the article. We are confident that you will arrive at the same conclusion as we have and you will have the same spine-chilling experience on the realization that it will not be a “Black Swan” that will trigger the collapse but that the impending collapse is but the natural and inevitable consequences of being addicted to the DRUG DEBT – the toxins having spread to all the major organs of the financial body.

Let us explain in simple language.

Why do the financial elites seek the power to “create money out of thin air”?

Read the above quotation by Josiah Stamp and think through to its logical conclusion.

Yes, you are absolutely right – the reason is to use that monetary power to make loans and create debts, to make borrowers (individuals, firms, corporation and nations) debt slaves!

However, debt is only toxic (and consign borrowers to slavery) if it is to be repaid with interest. And it is fatal when interest is compounded and you are unable to repay the debt and interest. In the case of an individual, you would be made a bankrupt, for the company, it would be liquidated and for a country, the financial rapists in the guise of the IMF and World Bank would devour all the national assets at rock bottom prices and compel the government and the people to do their biddings.

Debts used to be considered as “benign” (analogous to that of a benign tumour in your body) because the borrower was able to repay the principal debt and the interest within the duration of the loan. Loans were taken to facilitate production and repaid from the profits generated and to tide over short term liquidity shortfalls. For Joe Six-packs, loans were principally taken to acquire a home, usually the matrimonial property and there were few defaults as savings from hard-earned income would be sufficient to repay the loan.

Fast forward to the present scenario - it can be said without fear of contradiction, that a new culture has been cultivated by the financial elites – it was acceptable, the “new normal” to borrow for consumption from cars to television sets, kitchen hardtops and summer vacations regardless whether one could afford such expenses. When one could not afford to repay the existing loan, the loan would be “rolled over” (i.e. time extended for repayment as long as the accrued interest was paid, even if the principal was still outstanding). Then when things got a bit sticky, new loans were given out to repay the old loans and new interest rates were levied.

Interest rates were lowered so that borrowing became “cheap” (as no one bothered to calculate the inevitable consequences of compound interest). The “cheap money” extended to borrowers enable speculations across the entire spectrum of asset markets – housings, share, commodity and derivative markets and when asset prices skyrocketed, borrowers borrowed more.

It was a fantastic time to party, and the music never seems to stop playing. Everyone is experiencing a historic high!

We have now reached the stage of indebtedness (i.e. debt addiction) that we cannot even pay off the accrued interest. Nations across the globe, led by the biggest debtor in the world, the mighty USA are insolvent, bankrupt.

We have also reached the ridiculous situation where new loans are not even sufficient to pay off accrued interest on the old loans. So, central banks have resorted to creating money out of thin air via such programs as Quantitative Easing, a misnomer for printing money digitally or otherwise.

The policy-makers are now confronted with a Catch-22 dilemma – how long can they continue with Quantitative Easing before the creditors realize that the entire global fiat money banking system is bankrupt and the central banks back-stopping the TBTF banks is an exercise in futility on the one hand; and on the other, how long can US Dollar be debased as a consequence of QE1, 2 and 3 before global creditors and traders lose all confidence in the reserve currency as “money” in payment of all debts and obligations and abandon the same as no more than toilet paper money and storm out in protest to hard assets such as gold and silver to preserve their wealth and savings?

It used to be that interest rates were determined by market forces to a large extent, even though there were instances of central bank intervention as a means to control the devaluation of a currency.

However, presently even LIBOR (London Inter-Bank Offered Rate) which was a benchmark for global interest rates has lost its luster after the exposé of rigging by some of the TBTF banks.

Today, it can be said that the FED (specifically, the FOMC) controls the global interest rates.

The FED as well as other central banks have all adopted the zero interest rate policy (ZIRP) thereby creating massive liquidity in the banking system, encouraging irresponsible loans / borrowings which in turn gave rise to mal-investments and asset bubbles. It is analogous to being addicted to cocaine (debt addiction) as well as being addicted to alcoholism (low interest addiction).

The solution is Cold Turkey but no policy makers presently are willing to offer that prescription because the debate within the financial elites has not settled the issue once and for all. No final judgment has been reached.

The Janet Yellen team has only one more “over” in this financial cricket match before the next team comes on to bat. But, the critical question remains – in that scenario will there even be a team to come out to bat for the spectators may become so restless and AGITATED that they may rush to the field and beat the daylights out of the two teams and the officials for charging them such an exorbitant price to watch a screwed up and a fixed game?

[1] Abenomics is the name given to a suite of measures introduced by Japanese prime minister Shinzo Abe after his December 2012 re-election to the post he last held in 2007. His aim was to revive the sluggish economy with "three arrows": a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan's competitiveness (source: lexicon
[2] This is notwithstanding the failure of the Neo-Cons’ policies in Iraq, Afghanistan and the Middle-East. The Asia Pivot of the Obama regime is merely an extension and the continuation of the policy of dominance with the principal objective of maintaining the supremacy of the US Dollar.
[3] At one time, the Bank of England was the “Leading Central Bank” that determined all global financial policies and the Pound was the instrument for dominance. The FED replaced the BOE post World War 2.
[4] The mission of the Bank for International Settlements (BIS) is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.
In broad outline, the BIS pursues its mission by:
•    promoting discussion and facilitating collaboration among central banks;
•    supporting dialogue with other authorities that are responsible for promoting financial stability;
•    conducting research on policy issues confronting central banks and financial supervisory authorities;
•    acting as a prime counterparty for central banks in their financial transactions; and
•    serving as an agent or trustee in connection with international financial operations.
The head office is in Basel, Switzerland and there are two representative offices: in the Hong Kong Special Administrative Region of the People's Republic of China and in Mexico City.
Established on 17 May 1930, the BIS is the world's oldest international financial organisation.