{"id":8314,"date":"2010-04-07T12:30:48","date_gmt":"2010-04-07T16:30:48","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=8314"},"modified":"2010-04-07T12:30:48","modified_gmt":"2010-04-07T16:30:48","slug":"understanding-the-fed-not-just-the-myths-about-the-fed","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2010\/04\/07\/understanding-the-fed-not-just-the-myths-about-the-fed\/","title":{"rendered":"Understanding the Fed &#8212; Not Just the Myths About the Fed"},"content":{"rendered":"<h3><span style=\"font-size: small;\">By Editorial Staff<\/span><\/h3>\n<p>If you would like to understand more about how the U.S.  Federal                  Reserve works, you can spend some time on its website &#8212;  or you                  can get the real story. Elliott Wave International has  collected                  eight of Robert Prechter&#8217;s most trenchant articles about  what                  the Fed actually does. He takes on the misleading myths  about                  the Fed and explains what&#8217;s really going on as he writes  about                  these topics.<\/p>\n<p>How the Fed manufactures money<\/p>\n<ul>\n<li>How the Fed encourages the growth of credit &#8212; and  why that&#8217;s                    deflationary<\/li>\n<li>What gives the Fed the authority to bail out  troubled institutions<\/li>\n<li>The difference between creating money and  facilitating credit<\/li>\n<li>Whether the Fed can manipulate the stock market or  economy<\/li>\n<li>How the Fed is ignoring historical lessons about  central banks<\/li>\n<li>How the Fed&#8217;s actions, combined with public outrage,  may ultimately                    lead to its demise<\/li>\n<\/ul>\n<p>The eBook with eight chapters is called <span style=\"text-decoration: underline;\"><strong><a href=\"http:\/\/www.elliottwave.com\/r.asp?acn=9cp&amp;rcn=aa91&amp;dy=aa040610&amp;url=http:\/\/www.elliottwave.com\/club\/understanding-the-fed.aspx?code=41531&amp;articleid=1354\">Understanding                   the Fed: How to protect yourself from the common and  misleading                  myths about the U.S. Federal Reserve.<\/a><\/strong><\/span> Here&#8217;s an  excerpt to                  give you a taste of what you will learn.<\/p>\n<p>*****<\/p>\n<p><strong>The Fed&#8217;s &#8220;Uncle&#8221; Point Is in View<\/strong><br \/>\nChapter 13 of <em>Conquer the Crash<\/em> is titled, &#8220;Can                   the Fed Stop Deflation?&#8221; The answer given there was an  emphatic                  no. In barely a year the faith &#8211;and that&#8217;s what it  was&#8211;in the                  Fed&#8217;s inflating power has pretty much died. <em>Conquer  the Crash<\/em> quoted The Wizard of Oz, and now anyone can see that  there is                  no magic: just a man yanking on levers and blowing  smoke. Back                  in 1929, consortiums of big banks, using their  depositors&#8217; money,                  tried to save the debt-laden stock market. They failed.  This time,                  the new consortium was bigger: the Federal Reserve. But <em>Conquer                   the Crash<\/em> anticipated the end of that game, too:  &#8220;The                  bankers&#8217; pools of 1929 gave up on this strategy, and so  will the                  Fed if it tries it.&#8221;<\/p>\n<p>It is finally becoming obvious to everyone that the Fed  is failing                  in extending its bag of tricks to stop deflation. The  Fed&#8217;s balance                  sheet now contains more than 50 percent mortgage and  other bank                  debt. Perhaps the Fed is willing to blow the rest of its  AAA assets                  in the form of Treasury bonds, but somewhere between now  and then                  is the Fed&#8217;s uncle point. The markets, however, are not  so dumb                  as to wait for it.<br \/>\nThey can already see the end of that road, and they are  moving                  now, ahead of it.<\/p>\n<p><em>The Last Bastion against Deflation: The Federal  Government<\/em><br \/>\nNow that the downward portion of the credit cycle is  firmly in                  force, further inflation is impossible. But there is one  entity                  left that can try to stave off deflation: the federal  government.<\/p>\n<p>The ultimate source of all the bad credit in the U.S.  financial                  system is Congress. Congress created the Federal Reserve  System                  and many privileged lending corporations: Fannie Mae,  Freddie                  Mac, Ginnie Mae, Sallie Mae, the Federal Housing  Administration                  and the Federal Home Loan Banks, to name a few. The  August 2008                  issue cited our estimate that the mortgage-encouraging  entities                  that Congress created account for 75 percent of all U.S.  debt                  creation with respect to housing. For investors in  mortgage (in)securities,                  the ratio is even greater. Recent reports show that  these agencies,                  which have been stealing people blind by taking interest  for nothing,                  account for a stunning 82 percent of all securitized  mortgage                  debt. Roughly speaking, the government directly  encouraged the                  indebtedness of four out of five home-related borrowers.  As noted                  in the August issue, it indirectly encouraged the rest  through                  the Fed&#8217;s lending to banks and the FDIC&#8217;s guarantee of  bank deposits.                  These policies allowed borrowers to drive up house  prices to absurd                  levels, making them unaffordable to people who wanted to  buy them                  with actual money. Proof that these mortgages are  artificial and                  the product of something other than a free market is the  fact                  that while Germany, for example, has issued  mortgage-backed securities                  with a value equal to 0.2 percent of its annual GDP, the  U.S.                  has issued them so ferociously that their value has  reached 49.6                  percent of annual GDP, a multiple of 250 times Germany&#8217;s  rate,                  and that is not in total value but only in value  relative to the                  U.S.&#8217;s much larger GDP. (Statistics courtesy of the  British Treasury.)<\/p>\n<p><em><a href=\"http:\/\/www.elliottwave.com\/r.asp?acn=9cp&amp;rcn=aa91&amp;dy=aa040610&amp;url=http:\/\/www.elliottwave.com\/club\/Understanding-the-Fed.aspx?code=41531&amp;ARTICLEID=1354\"><strong>Do                   You Want to Really Understand the Fed?<\/strong><\/a> Then  keep                  reading this free resource as soon as you become a free  member                  of Club EWI. <span style=\"text-decoration: underline;\"><strong><a href=\"http:\/\/www.elliottwave.com\/r.asp?acn=9cp&amp;rcn=aa91&amp;dy=aa040610&amp;url=http:\/\/www.elliottwave.com\/club\/Understanding-the-Fed.aspx?code=41531&amp;ARTICLEID=1354\">Join                   now! <\/a><\/strong><\/span><\/em><\/p>\n<p>Well, the ultimate source of this seemingly risk-free  credit                  still exists, at least for now. When Bernake &amp; Co.  met in                  the back rooms of the White House in recent weekends, he  must                  have said this: &#8220;Boys, we&#8217;re nearly out of ammo. We have                   $400b. of credit left to lend, and we have two  percentage points                  lower to go in interest rates. The only way to stave of  deflation                  is for you to guarantee all the bad debts in the  system.&#8221;                  So far, government has leapt to oblige. One of its  representatives                  strode to the podium to declare that it would pledge the  future                  production of the American taxpayer in order to trade,  in essence,                  all the bad IOUs held by speculators in Fannie and  Freddie&#8217;s mortgages                  for gilt-edged, freshly stamped U.S. Treasury bonds.<\/p>\n<p>Now, what exactly does that mean for deflation? This  latest extension                  of the decades-long debt-creation scheme has essentially  exchanged                  bad IOUs for T-bonds. This move does not create  inflation, but                  it is an attempt to stop deflation. Instead of becoming  worthless                  wallpaper and 20-cents-on-the-dollar pieces of paper,  these IOUs                  have, through the flap of a jaw, maintained their full,  100 percent                  liability. This means that the credit supply attending  all these                  mortgages, which was in the process of collapsing, has  ballooned                  right back up to its former level.<\/p>\n<p>You might think this shift of liability is a magic  potion to                  stave off deflation. But it&#8217;s not.<\/p>\n<p>Believers in perpetual inflation will ask, &#8220;What&#8217;s to  stop                  this U.S. government from simply adopting all bad debts,  keeping                  the credit bubble inflated?&#8221; Answer: The U.S.  government&#8217;s                  IOUs have a price, an interest rate and a safety rating.  Just                  as mortgage prices, rates and safety ratings were under  investors&#8217;                  control, so they are for Treasuries. Remember when Bill  Clinton                  became outraged when he found out that &#8220;a bunch of bond  traders,&#8221;                  not politicians determined the price of T-bonds and the  interest                  rates that the government must charge? If investors  begin to fear                  the government&#8217;s ability to pay interest and principal,  they will                  move out of Treasuries the way they moved out of  mortgages. The                  American financial system is too soaked with bad debt  for a government                  bailout to work, and the market won&#8217;t let politicians  get away                  with assuming all the bad debts. It may take some time  for the                  market to figure out what to do about it, but as always,  there                  is no such thing as a free lunch. The only question is  who pays                  for it.<\/p>\n<p>The Fed is nearly out of the picture, so the consortium  of last                  resort, the federal government, is assuming the job of  propping                  up the debt bubble. It is multiples bigger than any such  entity                  that went before, because it can draw on the liquidity  of American                  taxpayers and clandestinely steal value from American  savers.                  So the question comes down to this: Will the public put  up with                  more financial exploitation? To date, that&#8217;s exactly  what it has                  done, but social mood has entered wave c of a  Supercycle-degree                  decline, and voters are likely to become far less  complacent,                  and more belligerent, than they have been for the past  76 years.<\/p>\n<p>An early hint of the public&#8217;s reaction comes in the  form of news                  reports. In my lifetime, I can hardly remember times  when the                  media questioned benevolent-sounding actions of the  government.                  Articles were always about who the action would &#8220;help.&#8221;                  But many commentators have more accurately reported on  the latest                  bailout. USA Today&#8217;s headline reads, &#8220;Taxpayers take on  trillions                  of risk.&#8221; (9\/8) This headline is stunning because of its                   accuracy. When the government bailed out Chrysler, no  newspaper                  ran an equally accurate headline saying, &#8220;Congress  assures                  long-run bankruptcy for GM and Ford.&#8221; They all talked  about                  why it was a good thing. This time, realism and  skepticism (at                  a later stage of the cycle it will be cynicism and  outrage) attend                  the bailout. The Wall Street Journal&#8217;s &#8220;Market Watch&#8221;                  reports an overwhelmingly negative response among  emailers. Local                  newspapers&#8217; &#8220;Letters&#8221; sections publish comments of  dismay                  and even outrage. CNBC&#8217;s Mark Haines, in an interview on  9\/8 with                  MSNBC, began by saying ironically, &#8220;Isn&#8217;t socialism  great?&#8221;                  This breadth of disgust is new, and it&#8217;s a reflection of  emerging                  negative social mood.<\/p>\n<p>Social mood trends arise from mental states and lead to  social                  actions and events. Deflation is a social event.  Ultimately, social                  mood will determine whether deflation occurs or not.  When voters                  become angry enough, Congressmen will stop flinging pork  at all                  comers. Now the automakers want a bailout. Voters have  remained                  complacent about it so far, but this benign attitude  won&#8217;t last.                  The day the government capitulates and announces that it  can&#8217;t                  bail out everyone is the day deflationary psychology  will have                  won out.<\/p>\n<p><span style=\"text-decoration: underline;\"><a href=\"http:\/\/www.elliottwave.com\/r.asp?acn=9cp&amp;rcn=aa91&amp;dy=aa040610&amp;url=http:\/\/www.elliottwave.com\/club\/Understanding-the-Fed.aspx?code=41531&amp;ARTICLEID=1354\"><strong>Do                   You Want to Really Understand the Fed?<\/strong><\/a><\/span> Then  keep                  reading this free resource as soon as you become a free  member                  of Club EWI. <strong><a href=\"http:\/\/www.elliottwave.com\/r.asp?acn=9cp&amp;rcn=aa91&amp;dy=aa040610&amp;url=http:\/\/www.elliottwave.com\/club\/Understanding-the-Fed.aspx?code=41531&amp;ARTICLEID=1354\"><span style=\"text-decoration: underline;\">Join                   now!<\/span> <\/a><\/strong><\/p>\n<p><em>Elliott Wave International (EWI) is the world&#8217;s  largest market                  forecasting firm. EWI&#8217;s 20-plus analysts provide  around-the-clock                  forecasts of every major market in the world via the  internet                  and proprietary web systems like Reuters and Bloomberg.  EWI&#8217;s                  educational services include conferences, workshops,  webinars,                  video tapes, special reports, books and one of the  internet&#8217;s                  richest free content programs, Club EWI.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>By EWI &#8211; If you would like to understand more about how the U.S. Federal Reserve works, you can spend some time on its website &#8212; or you can get the real story. Elliott Wave International has collected eight of Robert Prechter&#8217;s&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-8314","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/8314","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=8314"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/8314\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=8314"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=8314"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=8314"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}