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Greenspan and The Rate of Interest

Douglas V. Gnazzo
September 26, 2005

"And when he opened the third seal, I heard the third living creature saying, Come. And I saw, and behold, a black horse; and he that sat thereon had a balance in his hand. And I heard as it were a voice in the midst of the four living creatures saying, A measure of wheat for a shilling, and three measures of barley for a shilling; and the oil and the wine hurt thou not."

Introduction

Sir Alan decided to raise short term interest rates via the Fed Funds Rate by raising it 25 basis points or .25% to 3.75%. There has occurred much discussion in the media regarding the reasoning behind Greenspan's decision. Some attribute it to the fact that he is worried about the housing market overheating, as in a bubble that is getting steaming to the point of bursting. This scenario rationalizes that higher interest rates will slow down the booming housing market, which it may very well do - or not.

Others believe that the Chairman raised rates because he is worried about the myriad of bubbles in the United States today: the dollar bubble; the credit bubble; the debt bubble; the real estate bubble; the bond market bubble, and other various asset class bubbles. The rationalization behind raising rates for this scenario has to do with the same basic premise as above, however, it extends over a much wider group of markets and hence more of the economy as well.

Then there is the classic timed tested inflation scenario that prices are going up and will continue to go up - which they are, unless interest rates go up instead, acting as a braking mechanism of rising prices and economic activity in general.

When all is said and done, and hypothecated upon, what it all comes down to is that Mr. Greenspan is trying to ease the runaway train into the station without crashing it, stalling it, or causing any untoward damage - to the train, the passengers, and the surrounding pedestrians. It is not an enviable task, but rule from atop was never meant to be enviable, nor easy. If you don't like the heat, you don't go in the kitchen. The maestro is definitely in the kitchen; and the heat is rising.

The Conundrum

It appears that Sir Alan has a bit of a conundrum on his hands. He is stuck between a rock and a hard place so to say: damned if he does, and damned if he doesn't - damned if you will. Here's why.

The Fed Chairman wants to keep the U.S. dollar from collapsing against foreign currencies, as if this was to occur, the Chinese and Japanese would curtail their subsidization of the U.S. bond market, a.k.a. the U.S. debt market. Presently they account for over 40% of the purchases of our debt market, so if they say goodbye, it really could be goodbye - for us. Recently, however, Great Britain has stepped up to the plate as a heavy buyer of our debt, but they too could provide the kiss of death if the dollar was to take a plunge. Interesting times to say the least.

Greenspan hopes and prays that by fine tuning interest rates he can provide support for the dollar and keep foreign interests - interested in buying our debt. However, the Fed Chairman also knows that if he raises interest rates too much or too fast he will sink the housing market; and that he does not want to do. It has been the sea of liquidity provided by Greenspan and company that has kept the economy going via the housing market. If the housing market bubble bursts - the economy will be in dire straights. End of game.

Or in his own words from the recent Fed minutes:

"Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated."

"The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."

So you can see the conundrum he is in: both "core inflation and longer-term inflation expectations have remained well contained, but pressures on inflation have stayed elevated." That's one job I wouldn't want to have - walking a tightrope over a pit of lions is easier work if you can get it. I'm not sure if you have to be a juggler or a balancing expert to qualify for the job. Being a master magi couldn't hurt, however.

But On The Other Hand

But as we have said, Sir Alan doesn't want to pop the housing bubble, which means that he must offset rising interest rates. Now how does he pull that one out of his hat - he just creates lots of money and credit through prestidigitation. How do we know that the Chairman is saying one thing while doing another? Take a look at the money supply chart below in comparison to the federal funds rate chart, which do you think is rising faster?

The broadest U.S. money supply measure is M-3, as shown in the chart below. It was up $32.4 billion in the latest week. In the last 3 months, M-3 has been up $216 billion, which equates to an annualized rate of almost a trillion dollars a year. And that's just the money supply. In paper fiat land credit is just as good as money. We will place a chart of the Fed Funds Rate side by side for a quick comparison. Basically look for the steepest ascent of the little blue lines.

click on images to see larger charts

Unfortunately it does appear that the money supply is rising a bit steeper for a wee bit longer than the Fed Funds Rate has been. Lots of catching up to do, if such is the intent.

Doug Noland, who is as good as it gets about credit and debt reporting, had this to say about the candy suckers being given away in paper fiat land last week:

"Bank Credit rose $14.4 billion last week. Year-to-date, Bank Credit has expanded $622.9 billion, or 13.3% annualized (up 10.4% from a year earlier). Securities Credit declined $10.8 billion during the week, with a year-to-date gain of $156.8 billion (11.8% ann.). Loans & Leases have expanded at a 14.3% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 16.9%. For the week, C&I loans added $0.8 billion, and Real Estate loans gained $7.7 billion. Real Estate loans have expanded at a 15.9% rate during the first 36 weeks of 2005 to $2.822 Trillion. Real Estate loans were up $371 billion, or 15.1%, over the past 52 weeks. For the week, Consumer loans increased $2.3 billion, while Securities loans gained $5.8 billion. Other loans rose $8.4 billion.

Total Commercial Paper jumped $10.8 billion last week to $1.61 Trillion. Total CP has expanded $196 billion y-t-d, a rate of 19.5% (up 20% over the past 52 weeks). Financial CP rose $10.9 billion last week to $1.465 Trillion, with a y-t-d gain of $181.1 billion, or 19.8% annualized, and up 21% from a year earlier. Non-financial CP dipped $0.1 billion to $144.4 billion." [Doug Noland Courtesy of
Credit Bubble Bulletin - Sept. 16]

For a pretty picture to go with the above stated credit growth, Doug Noland offered this on his site:

[Editor's note: Commerical? Comical, Commercial:
Is this a clever play on words?]


[Doug Noland Courtesy of Credit Bubble Bulletin - Sept. 16]

Seems that the undertaker, as Ayn Rand used to affectionately call the Greenman, is adding some more punch to the bowl, and by the use of various concoctions, making for a strange brew that Madam Rue would be honored to serve. It would appear he doesn't want the partiers to go home just yet, before he satiates their thirst.

But alas, you know what happens when you indulge too much in the fruit of the vine - you end up making love to the toilet bowl as opposed to a loved one - plus you feel like what goes down the bowl. So much for over-indulgence. Perhaps we need a new 12 step program for credit addiction - especially for Sir Alan, as he does seem to be the enabler supreme for all things fiat or make believe - a true master magi.

What To Do

So what's a poor soul to do? Try to reduce debt. Try to cut back on spending. Try to save if possible. Live below one's means. Write down your present state of affairs, in front of you, so you can see in black and white where you are, and where you are headed.

Formulate a budget so you know exactly what you spend versus what your income is. Talk things over with family or friends that you can trust. But have a plan - short, intermediate, and long term plan. Set goals that are achievable. As you reach them you will gain self-confidence to try for even higher heights.

Once you can reduce debt and begin to save, then it's time to put the savings to work, to add to your income and wealth. Go easy at first if you are not experienced. Do not try for homeruns. He who is steady and grounded wins in this game. Blazing stars just fizzle out into the night sky. And most of all - be prepared for the unexpected - expect the unexpected, and you will not get blindsided. Forewarned is forearmed.

Gold

When you are in a position to consider such, consider gold. Gold is honest money. It is not some paper credit or debt, which is nothing but a promise to pay, an i.o.u. Gold is real money and can be used to directly pay off debt; it has no liabilities or strings attached. It is immediate payment for any transaction undertaken. Gold is no man's debt. Gold is the Sovereign of Sovereigns, when gold speaks all lips are silent. As the venerable Richard Russell, sage of the markets said the other night:

"But what of gold? Why is real money surging at this time? Gold is rocketing higher because gold is pure wealth. Gold represents wealth with no debt against it. Gold represents wealth outside the system. Gold needs no central bank, no government, no man or group of men -- to tell us that it's wealth. Gold stands alone in that regard. There's nothing else like it with the possible exception of gem quality diamonds, rubies, emeralds or sapphires." [Dow Theory Letter - Richard Russell]

For those interested in reading about the history of gold as Honest Money we offer the following as pretty good reads on the subject: Honest Money, GOLD: Sovereign of Sovereigns, Silver IS Money.

Gold's power and secret is that it is no man's liability, it is no man's promise or obligation to pay - it is payment, and has been so for 5000 years. Paper fiat as floated today has been around for a couple of hundred years, and that is even arguable, but another story for another time.

The big lie is that money and debt can be one and the same. They can't. You can not pay a promise to pay with another paper promise to pay. That is not payment. That is just rolling over the debt. Promises for more promises - to pay. Debt transference. Nothing more, and a whole lot less.

When debt is allowed to circulate as the currency - as debt-money - there is hell to be paid. The day of reckoning, the weighing in the balance, keeps getting pushed off farther into the future; but make no mistake about it, the day of atonement will come - if not by us, then by our children, and their children, which isn't the best of legacies to leave your loved ones. Leave them some gold instead.

As a picture is worth a 1000 words we will now provide a picture of total America Debt (which is on the books, as there is another like amount not on the books, what the magi's call off-budget or unfunded liabilities), and a picture of the loss of the purchasing power of the United States Dollar Bill, known as a Federal Reserve Note or promise to pay - a debt instrument.


Courtesy of Michael Hodges
The Grandfather Economic Report


Chart courtesy from Sharelynx at www.sharelynx.net

Confidence

The above state of affairs is what has led to a bit of a falling out of confidence among CFOs in America. How do we know? Take a look at the chart below. Seems they are aware of the rising debt levels, higher costs, and the loss of 95% of our currencies purchasing power - maybe that's why they are chief financial officers:


Courtesy of Duke University and contraryinvestor.com

All of which adds up to a kind of queasy feeling in the pit of one's stomach - like we're involved in some con-fi-dence game of sorts. Here you take my debt and I'll trade you it for mine. Let's rob Peter so we can make believe to pay Paul. It just doesn't work like that folks - and I don't care what they tell you - if they do - they speak with forked tongue, as the Indians can attest by the terrorist attacks they were subjected to a few hundred years ago in the land of milk and honey.

Be not deceived, they do not want you to know the Truth. The Truth is that Gold Is Honest Money. Debt is a four letter word of evil as presently peddled about. There is nothing wrong with debt - if it is debt created by the loaning of Honest Money, had by honest work, owned by those that earned it, and then lend it, by honest dealings with honest interest rates. Honest.

But when our money is paper fiat debt-money, it is dishonest money, and can only facilitate wealth transference from the many to the elite few. We The People need to stand up and reclaim our constitutional freedoms - our self-dignity and unalienable rights. Honest.

Power to the people, as it was the people that gave birth to the Constitution; it was the people that gave birth to our Country; it was the people that gave birth to the government. It was and Is about - the people.

We The People are Sovereign

Gold is the Sovereign of Sovereigns - remember it well.

Douglas V. Gnazzo

©2005 Douglas V. Gnazzo. All rights reserved.

All other views and comments are invited.

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