Hints of Depression and Hyperinflation Daryl Montgomery October 29, 2008 Copyright 2008, All Rights Reserved The contents of this presentation are editorial opinion and should not be considered as a recommendation to buy or sell any security.
The Troubled, Troubled Asset Rescue Program • Supposed to be used to purchase mortgage backed securities and objective is to get banks to increase lending. • Oct 13 th – Treasury announces plan to buy $151 billion in PREFERED stock (which is a perpetual LOAN) in 9 big banks; Interest rate for stock not reported (a good rate would match Buffet’s 10% from Goldman). Treasury falsely claims taxpayers are getting ownership in these banks. • Citibank, JP Morgan Chase, Wells Fargo, and Bank of America plus Merrill ($25 billion); Goldman, Morgan ($10 billion); State Street, Bank of New York ($3 billion); Treasury guarantees Mitsubishi’s stake in Morgan.
The Troubled, Troubled Asset Rescue Program • Oct 17 th – JP Morgan exec says on conference call that the bank will use the money for takeovers and expansion (reporter was listening in); Banks also get tax break for takeovers. • Oct 24 th – 22 Regional Banks to get funds, names to be kept secret (PNC takeover of NCC funded). • First preferred stock purchases this week. • Bank consolidation, not lending will result. Effectively just a transfer of taxpayers funds to the coffers of Wall Street banks. • Insurance and Auto companies want a piece of TARP. • Financial system being made more vulnerable.
The Credit Crisis in Europe • Iceland closes stock market, banks and freezes currency; emergency powers grant government total corporate control, stock market drops 77% day it reopens; Interest rates raised to 18%; problem too much leverage, not sub-prime. • Oct 13 th – Eurozone pledges $2. 3 trillion to support banks (dwarfs U. S. $700 billion bailout); UK and France close to half a trillion each. • Britain nationalizes RBS, Lloyds TBS and HBS. • Caisse D’Epargne trading scandal in France. • Switzerland $60 billion to UBS for 9% stake. • Holland $13. 4 trillion to ING • Hungary and Ukraine seek IMF aid.
The Money Pumping Spigot • Oct 13 th – Fed, ECB, Bank of England, Switzerland promise UNLIMITED U. S. dollar fund liquidity to financial institutions. • That week, Fed borrowing hit a record $438 billion per day; Treasury sold $499 billion in T-bills to support lending (all advanced economies borrowing, who is buying the bonds? ). • Fed announces $540 billion program to directly support money market funds to replace program to lend to banks to buy money market fund assets ($123 billion had been lent out). $341 billion in withdrawals had taken place since beginning of that program. • LIBOR calms down after JP Morgan (closely tied to the Fed) intervenes to lower rate. • Today Fed cuts rates 50 basis points to 1. 00%, the same rate that helped create the credit crisis. • Banking system imbalances indicate depression/hyperinflation.
Adjusted Monetary Base. Currency Plus Bank Reserves
Total Reserves – Sum of Deposits that count for Reserve Requirements
Borrowed Reserves – Falling Number Indicates Easier Credit
Non-Borrowed Reserves – Total Reserves Minus Discount Window Borrowing
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