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These are uncharted
waters, indeed. The shenanigans being foisted upon us by Washington are unprecedented
at least since World War II, and probably ever. There is so much complexity,
if not sheer trickery, going on that it becomes increasingly difficult to
make any sense of what’s happening, much less what the net effect is
going to be.
Nevertheless, we
must try.
As always, the first
line of inquiry should be directed at the data, for the raw numbers tell us
things that our politicians will reveal only reluctantly, if at all.
Let’s first
take a look at what didn’t happen: Casey Research Chief Economist Bud
Conrad has been scrunching the numbers to distill the bigger picture. Over
the past four months, American banks have received massive amounts of bailout
money, ostensibly to unfreeze the credit market and enable the banks to lend
money again. That it didn’t work is obvious from a couple of charts. Here’s
Bud’s first chart.
 
Note that
banks’ cash assets rose by over a half-trillion dollars in just two and
a half months. That’s primarily the money (ours) that was handed over
to them via the Federal Reserve. Did it go to a socially useful purpose?
Mmmm… no. In actuality, we got scammed.
Here’s how the
scam operated: the Treasury borrowed our dollars via the sale of Treasury
notes and deposited the cash at the Fed. The Fed used the money to relieve
banks of their most toxic liabilities. But instead of lending it, the banks
simply bought more Treasuries, thereby polishing up their balance sheets. This
is made starkly evident by Bud’s second chart, where you can see that
cash was being hoarded even as lending declined.
The net result of
this asset shuffling is that the Treasury (that’s us) incurred more
debt, the Fed absorbed all manner of toxic waste for which it may not get 10
cents on the dollar, and the banks wound up with many more bucks and much
less junk, leaving them sitting pretty and chuckling all the way to…
well, to the bank.
These were not
small-potatoes moves, either. Check out Chart 3 below.
That bears repeating.
The Treasury Department, on our behalf, nicked us for a cool trillion in
three months. Never been done before.
And remember, over
the same period, the Fed was bloating its balance sheet with financial
garbage to the same trillion-dollar tune. Chart 4 shows the path of the reverse
meteor.
As badly as it’s
behaved at times, the Fed hasn’t done anything remotely like this in
all its checkered 95-year history.
What’s our
point? Simply this: delicate financial balances are quickly falling into
imbalance. Responses of gargantuan size have merely served to keep the system
from collapsing and have barely begun to improve it. Thus, the situation is
not yet stabilized. There will be new surprise problems, and bigger
responses, for the foreseeable future. Of that we can be certain. And
collectively, all the government’s responses will inevitably have a
negative effect on the value of the U.S. dollar.
With all these
momentous forces at play, it’s understandable that you would feel small
and powerless. Obviously, you can’t fight City Hall. But are there ways
to play along with it? Is it possible to survive, and even prosper, while the
economy heads for hell in a handbasket?
Yes… but you
must look behind the headlines, learn to follow locked-in trends, and develop
the foresight to invest counter to what the herd may be doing. The Casey Report brings you
opportunities to accomplish just that.
In these times of
crisis and extremely volatile markets, the trend can truly be your
friend… if you recognize it in time to profit while the investing
masses are still oblivious. Month after month, The Casey Report scrutinizes and
analyzes emerging trends – a strategy that has been providing our
subscribers with double- and triple-digit returns. Learn
more here.
Doug Hornig
www.caseyresearch.com
Doug Hornig is a senior editor
for Casey Research, publishers of Doug Casey’s International Speculator… for
over 27 years providing investors with unbiased and carefully researched
recommendations for high-quality gold and other natural resource stocks with
the very real opportunity for a 100% or better gain within a 12-month
horizon. Hornig also writes the Daily Resource, a daily column that appears
on the KitcoCasey and CaseyResearch.com web sites.
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