That's What The Federal Reserve Put in The Reserve Accounts

Let's cut to the chase and get right to the insults and paranoia…

Gary,

Reading your rather naive view of Capitalism - I couldn't help thinking that if BS was music, you would be a brass band.

In reality our lives are controlled financially by the major banks.
When they allow some financial latitude - people spend and consume.
When they close down in terms of lending, them we wind down into virtual poverty.
Which is where we are heading now.
They do this deliberately.
Like fattening up turkeys for a dinner a little time down the road.

They laugh at us while they are manipulating our lives - for their own profits.

One of the Rockefellers told Aaron Russo the filmmaker that women's lib did not happen by accident. It was promoted by his people (through lots of publicity in magazines etc) so that women would have more freedom, join the workforce and then be taxed. In other words they wanted to exploit women financially, but they also wanted to break down family life, as we have known it.

There are vast numbers of single people these days.

It's all secret manipulation. And the worst is yet to come.

Wait till everyone is micro-chipped and discover that if they question certain things - their access to banking and other services get cut off.
Your free society is about to evaporate.

Now look at these words of Byron:

If savings cannot find a safe harbor in the U.S., then the capital flows will keep moving offshore. And if that happens, all bets are off for the U.S. economy. We can just sit back and listen as the band plays "Nearer, My God, to Thee."

He is right of course and he is not even taking into account the volatile US dollar and the vast holdings of US dollars abroad which might be dumped at some time.

We have just one hope and that is that government sponsored banking will sideline the private banks and sever the control that they have on our lives.

But you odd libertarian people can't support that kind of development because you have this silly commitment to so called free markets - which in reality is whatever crumbs the banks will allow to fall from their tables.

By always supporting the naive view that we have a free society and free markets - you only assist the dominant banks to continue to have a stranglehold on our lives.

I sigh deeply and heavily as I begin typing this…

Like many who write in to tell me I'm full of it or stupid or congenitally criminal, you failed to read what I wrote before you started dashing off a response.

Who the hell said I think for a second that we have a free society and free markets?

Who?

I yearn for these things ― the way I yearn for Summer Glau…

But I don't for a moment think I have a Chinaman's chance of getting either one in this lifetime or a billion iterations thereof.

It must be my insistence on the use of the word "capitalism" without implying a big, black moustache, top hat, cape and villainous laughter. I don't see Capitalism as tying the blonde damsel to the railroad tracks, so I'm obviously brainwashed.

And while I agree with you about the general evil of central banks, the rest of your letter makes me suspect that you both dress up in women's clothing and are never without your tin foil headgear. There may also be a corpse or two whose location only you know.

Hmmm…Maybe I shouldn't be provoking you like this…

Next letter:

It seems to me that the reason capitalism/free markets are discredited is that everything that Wall St does is described by them and by the press as "free markets".  When Congress tried to increase S-CHIP, Bush said it would interfere with the free market.  They have used "free markets" to justify monopolistic activity.  As it all crashes down why wouldn't unaware people (most of us) not believe that free markets don't work?

Yeah. Why?

Tell it to that first guy. You may have to speak up to be heard over the voices in his head though.

Next!

A Shooter says: "Hey...on the climate/carbon bill...we got to start somewhere. What does it matter if we have $ but not clean air and water?????? We are the polar bears."
 
I says, what does it matter if we have clean air and water and starve to death or freeze to death from lack of energy or [because of] a failed currency with which to purchase these essentials?  Why do we need "to start somewhere" on a task that is patently destructive of our economy, has a questionable basis in science or in fact, and delivers massive power to those whose chief end is to lord it over those of us who just want to get about living free?  Lord, deliver us from those who know best for us!!

Indeed.

Now it's time for an introduction.

We have a new voice at the bar. Auto mechanic turned aerospace engineer turned financial planner and now Whiskey curmudgeon Tex Norton will be writing to you later this week. I promise you'll like it.

In the meantime, you can read a little something from Tex on our website in the Morning Whiskey section.

Our Whiskey family grows…and a happy tear springs to your editor's eye.

And speaking of growing families…

Web production associate and former office neighbor Paul Tuccinardi and his wife Kristin recently welcomed their first child, Austin, into the world. The Whiskey Room denizens send congrats and best wishes. Salut!

And remember a little while back I told you my publisher and I were concocting some way to recognize the larger Whiskey faithful and near relations?

Well, we were…and we are a little closer to coming up with something. It's not too momentous, but it ought to be fun.

We'll be back here tomorrow with news from Roving Whiskey Reporter Samantha Buker…and vital information about Summer Glau. You don't want to miss it.

Some Fridays are better than others. This last one was not pretty. Like a character that refuses to die in a bad horror movie, the U.S. job market posted some shocking June numbers. It has revived the dormant nightmare that this may be a long "L" shaped recession. Or even worse, a double dipper, with the second dip just getting started.

The U.S. Labor Department reported that around 467,000 Americans lost their jobs in June. This was unwelcome news. The data had been getting less bad every month since January. Then the June numbers rocked up, fell out, and took top stocks down with them. This is causing everyone with a pulse (and most with a brain) to have second thoughts about just how good things are-or how much worse they might get.     

The S&P and the Dow both fell nearly three percent. Oil and gold were down too. About the only things up were Treasury bonds and notes. Speaking of which, the U.S. will auction another $73 billion of those this week. Wednesday's auction is for $19 billion in ten-year notes while $11 billion in 30-year bonds go on sale Thursday.

"You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that's breaking," Black Swan author Nassim Taleb told CNBC's Squawk Box. "Anything that's fragile like the financial system will eventually crash, he said...We're in the middle of a crash...So if I'm going to forecast something, it is that it's going to get worse, not better."

Taleb's point is not a popular one. But it is a realistic one. The fiat money, leveraged finance Western financial system went global in the last twenty years, providing an epic rise in asset prices (and the debt used to purchase them). There's no doubt that real goods and services have traded hands with world growth. But now we wonder how much of that is sustainable when you take the credit away.

Did we use phony money to build a world with completely unrealistic levels of growth? Were trillions of dollars of capital allocated based on final demand that was artificially pumped up by credit, currency manipulation (low U.S. interest rates and global dollar pegging), and government stimulation?

Yes we did!

Mind you, the crash of the financial system is not the end of the world. It is a massive calamity to be sure, wiping out the value of retirement assets many people were counting on to make it through their golden years. But as many readers have reminded us in the last few months, there is more to life than money.

Fair enough. But there is more to wealth than money too! Peace of mind, having your assets in forms that can't be inflated away or won't suffer from debt deflation...we would count these as "wealth" at a time like this.

That brings us back to the problem growing at the back of our mind yesterday. Can a massive deflating credit bubble nullify the liquidity measures by central bankers, which are puny in comparison to the nominal value of the assets at risk? "Yes you can!" comes the answer from some of the friends we put the question to.

"I'm tempted to disagree that expansion in government credit won't reach the economy and therefore won't be inflationary," replied Money Morning editor Kris Sayce. "I'm not mistaken, the Fed is buying up these 'assets' in order to take them off the banks and also to help price them. If the Fed didn't do this then the banks wouldn't be able to lend extra money to customers as they would breach their lending limits."

"It's not so much that the Fed is directly feeding the banks money which flows through to the economy, it's more that the Fed is feeding the banks money which allows them to expand lending which they otherwise wouldn't be able to do. Thus at the very least is preventing prices from falling, or from falling as much as they ordinarily would without the intervention. In effect there is more money flowing in than there otherwise would be. There already IS inflation."

Another colleague in the States replied that, "I am leaning more and more to the idea that the credit-based stuff will deflate (real estate, stock prices of 2010) but the cash-based stuff could rise (like foodstuffs, energy). In a way, it's not a debate about inflation or deflation, but which assets inflate and which deflate. There might be a strong dichotomy within the economy between the two."

To the extent that you cannot eat a mortgage-backed security, we see the wisdom in this view. The world has a lot of people. They have a lot of real needs. Regardless of the value of derivatives and opaque financial assets, a certain level of economic activity for a certain kind of tangible good will still be there. The challenge for investors is to determine if you can profit from this in traditional ways (top stocks 2010 and bonds) or if you have to venture into less traditional asset classes and forms of ownership (land, real commodities, precious metals).

And of course, the thesis could be incorrect. If credit is not money ― or if the large lending and government guarantee programs don't reignite a lending boom in the real economy ― then you may simply see a lot of wealth disappear down the memory hole.

Finally, a mystery Aussie commentator who wishes to remain anonymous but whom you may hear from in the future in this space sent a philosophical yet practical reply.

"What is money? Currently, that's what the Federal Reserve (and other central banks) put in the reserve accounts of their member banks. The banks then use this as a base to create their own money, or 'like money'. I guess this is also known as credit. So yes, credit is not money.

"And this bank credit is now contracting as the natural force of the market tries to drive prices lower and correct the boom. The Fed is offsetting this process by swapping 'money' (fed funds) for the impaired assets. But the banks are sitting on the cash, and obviously do not have the risk appetite (or the demand) to lend it out."

"So at this point additional base money is not being lent out as inflationary 'like money'. I'm not sure the Fed has the mechanism to make out and out purchases of assets other than through lending facilities, unless they are Treasury or Agency purchases. As far as I'm aware, the Fed can only distribute its newly created money through the banking system, and no other way. The banks have always been the source of inflation, and they need to lend to create this. They will probably use their excess reserves to buy Treasury's in the coming years, and then the Fed can but the Treasury's back off them in time. This will be inflationary."

"Where does gold come into it? Well, gold is real money...chosen independently by the people. As trust in the US dollar continues to evaporate, demand for gold will increase. At some point gold will again be referred to as money. Because the amount of credit (debt) in the world dwarfs the amount of gold, and because gold will be a legitimate extinguisher of the debt, gold will likely rise massively to have the capacity to extinguish the debt. This is a process unfolding over years though.

"A rising gold price is actually deflationary in that it represents a rise in the purchasing power of money. So I think deflation is the ultimate force that cures this massive credit bubble...outright deflation if long-term faith in the US dollar remains, or gold price induced deflation should the bottom fall out of US dollar trust. The quantity of US dollars may be rising at the moment but the real turning point will be when the perceived quality of the dollar declines."

Hmm. Gold rising indicates the rising value of cash...because gold is money. But if money is not wealth...and gold is money...does this mean gold is not wealth? Now there is something to think about.