The Fed has promised to buy $1.75 trillion (yes, that's trillion) worth of mortgages, many of which come directly from troubled banks like Citigroup.
Lots of people realize the government is propping up the banks with their repeated bailouts. But most folks don’t understand the real way the government is saving the banks. It’s not the shares the feds bought (and paid too much for). It’s the whole system of paper money. The government is deliberately keeping short-term interest rates super low so the banks’ funding costs almost disappear. Then, by running a huge budget deficit and spending record amounts of money on domestic programs, the government insures inflation (and longer-term rates) will remain high. The banks make money on the spread between short-term rates and long-term rates. And just to make sure nothing goes wrong, the Fed has promised to buy $1.75 trillion (yes, that’s trillion) worth of mortgages, many of which come directly from troubled banks like Citigroup.
In short, there’s no way these banks can lose. And here’s the best part… According to the Congressional Budget Office, this secret plan to save the banks is free. No line item anywhere in the budget accounts for interest-rate manipulation or the Fed’s mortgage buying. It’s all “free.”
But of course, there is a real cost.
The value of our currency goes down with every new dollar the Fed prints and with every dollar of new deficit spending. But the politicians can all pretend inflation doesn’t exist. When it shows up in our economy, they can lay the blame with “speculators” and oil companies.
The government can manipulate the dollar like this because it’s not backed by gold. President Nixon “temporarily” cut the tie between the dollar and gold in August 1971. Nixon promised the dollar wouldn’t be devalued – “your dollar will be worth just as much tomorrow as today”… At the time, $35 would buy an ounce of gold. Today, it takes more than $1,100. That’s a 97% decline in purchasing power.
It’s fascinating how many people believe this won’t happen again… despite the fact that we’ve got runaway deficits, we’re trying to fight two overseas wars, we’re about to pass the largest new entitlement program in history… and we’re propping up every major bank in the United States.
I’m not surprised gold is trading at $1,100 an ounce. I’m surprised it’s not trading for more than $4,000.