–First up today is a clarification on yesterday’s DR. If you’re forwarding the Daily Reckoning or Money Morning to your friends, family, or total strangers, you have absolutely nothing to worry about. The Daily Reckoning and Money Morning are free. Distribute to your heart’s content. Just please supply a link back to us.
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–But if our records show that you’re forwarding a subscriber-only email or report from one of our paid services—Australian Small-Cap Investigator, Diggers and Drillers, Slipstream Trader, Sound Money. Sound Investments, or Australian Wealth Gameplan—then yes, you may be hearing from us soon.
–Speaking of hearing, the stock market has started to speak up for itself. For the first time in seven days, the S&P 500 closed up on the session in New York. It was a welcome relief from the hangover inspired by Ben Bernanke earlier this week. He’s going to make the market beg for more money. Maybe that knowledge is what’s sparking trouble in the “risk markets”.
–The price of subprime bonds and other junk bonds is falling in the credit markets—again. In a headline that could have gotten in Dr. Who’s TARDIS back in 2007 and jumped on to today’s paper, the Wall Street Journal reports, “A steep decline in prices of bonds backed by subprime mortgages has spread through the riskiest segments of the credit markets, ending rallies in high-yield corporate bonds and commercial real-estate debt.”
–So it turns out the bonds backed by garbage assets do not actually age like fine wines. They continue to stink up the financial system, in fact, especially now that the Federal Reserve has tried to tidy up its balance sheet by selling back some of the junk it bought from AIG a few years ago.
–The Fed was trying to unload about $3.8 billion in bonds on Thursday. But it could only sell half of that (to whom, one wonders). It’s already sold nearly $10 billion (about one third) worth of bonds from its Maiden Lane II portfolio. That’s the account where AIG’s subprime effluent went to cool its heels until some moron hedge fund manager could be induced to buy it.
–And so we return to the subject broached earlier this week of “the Money Power”. The phrase isn’t ours. And just to be clear what we’re talking about—as opposed to what other people mean by “the Money Power”—we’ll define it for you. “The Money Power” is the disparate group of financiers and bankers who profit the most from accumulating assets when they’re cheap and selling debt to the government and the public.
–The above description may not sound sinister. And it probably isn’t, at least in the sense that the ultimate aim of wealth and power through ill-gotten advantage is more or less the same goal of organised crime. It’s as old as humanity, really.
–What makes the Money Power so destructive is that it achieves its aims through the control of the price of money. This allows it to engineer a cyclical wealth transfer from the public purse to the private purse and from the Middle Class to the Bankers.
–Now normally we wouldn’t use such incendiary and populist rhetoric. And to be clear we don’t mean to suggest there’s any kind of global conspiracy by a secret and shady group of elite trans-national criminals. That would be a good story, though.
–No, what we mean is that there has always been profit in controlling the price of money. Think about it for a moment. Imagine you run a business where you can create the product you sell at no cost AND charge interest for its use. You turn your cost of capital into a rental income. That is a pretty clever trick.
–The Money Power has accomplished this trick through the artificial setting of interest rates and fractional reserve banking. With fractional reserve banking, banks can expand credit far in excess of the accumulated savings on deposit in the banking system. Through manipulating interests, the banks can make the cost of this credit appear attractive to the public.
–And indeed, for awhile, the low cost of credit—or what is also referred to here as “access to mortgage finance”—induces people to borrow so they can buy assets (stocks and bonds and houses). A vast accumulation of private debt ensues, driving up asset prices and looking rather benign.
–But then, when a crisis hits and asset values begin to fall—as they always do when they become too expensive relative to the income they generate or the value they deliver—the debts accumulated at low interest rates do not change in value. The Money Power can then buy up the assets at bargain basement prices, while tending to its debt slaves and collecting interests.
–There is a further wrinkle, too. The government! U.S. interests rates (at least short-term rates)—otherwise known as the price of money—are set by a private cartel of bankers (the Money Power). The Money Power is happy to encourage large government debts because it makes money by lending money to the government. Whether the government is borrowing money for foreign wars or domestic wars doesn’t matter.
— The Money Power benefits from the permanent expansion of the Welfare/Warfare State because it means the permanent expansion of government debt (debt that will never be paid off, only refinanced or defaulted on). The result is the same as in the private sector, only this time the State is forced to sell assets off to the Money Power at fire sale prices. This is what’s happening in Greece now.
–And of course, this is what’s been happening in cycles for years. The advocates of debt-based money have simply sunk their tentacles into the financial life of the world more effectively now than at any other time in history. Private and public debt has exploded across the globe. Creditors earn interest on the loans they’ve made. But because of fractional reserve banking, they are able to create new product (money) out of thin air at no cost.
–It’s a great racket if you’re on the inside. But if you’re on the outside, this systematic transfer of wealth through manipulation of money and interest rates turns the economy into a boom-bust nightmare. It also impoverishes a lot of people, leaving them with no assets and a lot of debts.
–This is why the Money Power both loves and hates gold. It loves gold and owns it because gold is money that is not anyone else’s debt. It hates gold because it allows the common man to insulate himself against the manipulation of interest rates and inflation.
–This cycle of inflating assets and increasing debts through fiat money and fractional reserve banking isn’t necessarily by design. And you don’t have to be a conspiracy theorist to believe it. But you do have to be willing to entertain the idea that the entire edifice of the modern financial system is based on a monetary fraud.
–Now we realise that this knowledge—or this claim—is more than some people care to worry about on a holiday weekend, much less plan for. But we promised to explain what we meant by the phrase. And now we have. Comments can be sent to email@example.com
–On an entirely different and completely non-financial note, the human spirit—despite the Money Power—is also pretty cool. If you’re not so sure, we challenge you to watch this YouTube video and not smile. Thumbs up everybody, for rock and roll!
Daily Reckoning Australia