The setting

Since 2008, the Fed has been running a massive fiat “money” printing experiment never ever attempted in the history of mankind as no alternative “non-fiat” currency exists anywhere in the world today. This is uniquely unprecedented.

The nasty mess the Fed has gotten everybody into --including itself-- is definetly not new. As a matter of fact, government-imposed fiat currencies have been historically plentiful albeit short-lived. What´s new is the lack of real Money alternatives to the one-and-only failed world reserve currency we have today.

The Fed’s tiny rate hike after almost 10 years of ZIRP doesn’t change the above one bit.

Nowhere to hide

True enough, since 2008 the Fed has bought time at the expense of SIZE to the tune of many trillions of un-backed US dollars printed with impunity. Other less used currencies (Euros, Yens, and UK Pounds) have reacted accordingly as Jim Rickards has described in detail in his “ Currency Wars” and “ The Death of Money”. All of the above are just way over-printed IOUs.

So, mere fiat “money” claims on goods and services – IOUs with no intrinsic value-- today exceed the underlying economy by many multiples, after the US Federal Reserve started with and triggered off worldwide “competitive devaluations” amongst the other fiat currencies in existance.

Debt-fueled financialization has limits which makes enforcement of current and future fiat money claims impossible. So now the world is in for a financial-monetary reset, dimentions and consequences of which are overwhelming.

The Fed knows this while the mainstream press reports that “they” have the tools to fix it. Not the Fed, nor any other central bank for that matter. The Fed´s nuclear option described below looms above us all.

Genesis

It all started by pushing capitalism without capital, which is like spreading religion without God.

So we do not have real Money in the system now, only humongously massive amounts of legal tender fiat “money” with no intrinsic store of value led by the US dollar as world reserve currency. These are claims on goods and services that eventually can only be manufactured or rendered at hyperinflationary prices while unfunded liabilities simply can´t be honored.

In an unbelievably Marxist revelation, Henry Kissinger stated that ´whomever controls money controls the world´. With the US dollar as gold-backed world currency, President Richard (“Tricky Dick”) Nixon took his advice and on Sunday, August 15, 1971, repudiated the dollar-to-gold convertibility. This was a unilateral decision which flagrantly violated the post WW2 Bretton Woods agreement with no prior consultation with the rest of the world. The outcome was to have a fractional reserve world monetary system based on US dollars backed by thin air.

So far, this has allowed Americans to consume far far far more than what the US produces through unbelievable paper-for-goods transactions. The problem is that economics --the dismal science-- is not religion. Plus the fact that geopolitics and peoples´ reactions are not anywhere close to being predictable as described hereinafter. Please see http://www.counterpunch.org/2015/11/25/too-big-for-fed-have-central-banks-lost-control/

Deflation cometh

The deflation-unemployment vicious circle in today's debt-saturated economy means banks struggle to get loans payed back while tax revenues decrease. Deflation means yet more 'non-performing' loans, i.e., more defaults. No way that can be allowed to happen, not with the Fed running today´s financial circus.

Large Banks and the Fed are one and the same thing. The `Federal Reserve´ is a purposeful oximoron. The Fed is as federal as Federal Express, it has almost 0 (zero) reserves, and is now leveraged 113 to 1, meaning it is literally broke. Please see http://kingworldnews.com/this-ticking-time-bomb-that-now-threatens-the-entire-global-financial-system/

​Central planning

So the Fed decided to remedy such intolerable situation with massive QE intervention (printing) which, besides relieving banks from their toxic assets (read ´bad loans´) would supposedly jump start consumption through the "wealth effect" created by rising stocks. Then, in central planning theory, this would generate enough new income and salaries to pay back debts while increasing tax revenues as the velocity of “money” increases from today´s 2008 lows.

So CPI inflation is what the Fed has wanted all along as commodities and employment keep plunging while loans can't be serviced. But all they got from QE was to pick-up banks´ toxic debt and to promote asset inflation, mainly in stocks. The reason is that there is no room for consumption when drowning debt repayment is your 'top of mind'. You can lead a horse to water but you cannot force it to drink.

Un-intended consequences

Buy-backs is the funny money gimmick through which banks comply with their “financial duties” by loaning out freshly printed (out of thin air, mind you) QE dollars handed over by the Fed only to creditworthy customers (corporations)… in order for them to buy-back their own stock. Simple see ?

So corporate game plans do not include R&D investments, or productivity increases or earnings growth or higher wages. Just BTFD and personal, self-assigned, fat-cat bonuses. May we have more QE please ?

So in lack of creditworthy loans for regular folks and SMBs (where 80% of jobs are to be found and new ones created) the Fed´s QE so far has cleaned up toxic debt from banks´ balance sheets and increased income inequality making Wall Street happy (stocks up) and Main Street miserable (employment down)… all at taxpayers expense.

But artificially created stock market booms systematically fizzle sometime after fiat currency printing stops. So it´ll have to be QE4ever, unless they nuke us all.

The nuclear option

With CPI inflation as a goal, “helicopter money” will probably be the Fed´s next (unsuccessfull) trick in the bag. It´d buy even some more time (a couple of years ?) by blowing a Super Jumbo BUBBLE that Karl Marx never dreamed that capitalism would ever allow to happen. Please see: http://www.zerohedge.com/news/2015-12-06/it-begins-desperate-finland-set-unleash-helicopter-money-drop-all-citizens

…”… Rather than buying assets, central banks (would) credit our bank accounts. That, after all, may be more effective than buying assets (read ´stocks´) and would not imply the same transfer of wealth as previous or current forms of QE (read unloading of ´bad loans´). Indeed, ‘helicopter money’ can be seen as permanent QE, where the central bank commits to making the increase in the monetary base permanent…”…a la Banana Republic we should add.

…”…Again, crediting accounts does not guarantee that money will be spent – in contrast to monetary financing where the newly created cash can be used for fiscal spending...(A)llow us to just say that this is pure, unadulterated insanity. There's not even any humor in it anymore…”…

…”…You cannot simply print a piece of paper, sell it to yourself, and then use the virtual pieces of paper you just printed to buy your piece of paper to stimulate the economy. There's no credibility in that whatsoever…”...

And it will end only one way

…”… When the central state issues $1 trillion in bonds and drops the money into household bank accounts, the central bank buys the new bonds and promptly buries them in the bank's balance sheet as an asset…Until, of course, the sovereign debt piles up into a mountain so vast that servicing the interest absorbs 40+% of all tax revenues (just like Japan today)

Please see: http://www.zerohedge.com/news/2015-10-07/you-never-go-full-krugman-insane-helicopter-money-calls-continue-trapped-central-ban

Ludwig von Mises

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." [Human Action, Regnery, 1966, p. 572.]

As JP Morgan reminded us all, gold is the only real Money we have, the rest is credit.

Physical gold encompasses the summation of all the advantages of all other possible forms of money + 2 (two) unique additional ones:

(1) 6000 years of proven track record no other form of Money has, something deeply embedded in every human mind.

(2) the marginal value of each additional unit of gold stored (whichever) is infinite.

Please see "The Coming Revaluation of Gold" http://plata.com.mx/Mplata/articulos/articlesFilt.asp?fiidarticulo=281


Disclaimer: The contents of this article are of sole responsibility of the author(s). The  Independent International Political Research Center will not be responsible for any inaccurate or incorrect statement in this article.  


​The Fed's Nuclear Option​


        

          By Jorge Vilches, IIPRC, February 2, 2016


Photo: Rex/Zhang Jun