Thread: The Fed and monetary trickery

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"Just prior to departing on my recent trip to Croatia, the U.S. Treasury managed to pull a rabbit out of the hat by moving on the order of a quarter of $1 trillion of notes of various relatively short-term durations.
As you may recall, in the week prior to my departure to Croatia, the U.S. government unloaded close to a quarter of a trillion dollars in a series of auctions. You may also recall that the auction of $39 billion worth of 5-year Treasury notes held on the second-to-last day of the auction was considered something of a failure by the market.
It was therefore a surprise when the very next day the government was able to easily sell $28 billion in 7-year notes, earning the Treasury kudos and encouraging expectations that the worst of the credit crisis is over.
While going through the mountain of unanswered e-mails that had piled up in my absence, I came across one from Dan Ferris, editor of the Extreme Value letter, pointing me to an excellent bit of investigative research done by Chris Martenson, a blogger I have quoted here before.
What Chris discovered was that as soon as the primary dealers had snapped up the 7-year paper, they turned around and sold half of it to the Fed. This bit of monetary trickery, which was clearly planned in advance, accomplished two things. First, it created the impression that there was abundant demand even for longer-term Treasuries. And second, it obfuscated the fact that the Fed was being forced to step in to monetize the debt."
You can read Chris’s excellent work by clicking here <http://www.chrismartenson.com/blog/fed-buys-last-weeks-treasury-auction/23880> .
A number of thoughts leaped to mind as I read this revelation, starting with "Those egg-sucking bastards!", an appropriate thought given that it is proof that the government made a deliberate effort to deceive the market. And, in so doing, it caused investors here and abroad to make poor decisions about their money.
Of course, at least in the government’s minds, the subterfuge was undertaken for all the right reasons. If the auction was to fail, it could lead to a series of failures, and worse, as the world’s increasingly skittish buyers ran for cover, triggering a Zimbabwe-like death spiral for the dollar and the economy.
Faced with the choice between simply calling the whole thing off – which is to say, canceling the many spending programs now on the flight deck – or coming up with new, institutional varieties of Three-card Monte <http://video.google.com/videoplay?docid=-163435387173807719&hl=en> , a game used to fleece rubes in public gathering places, the government has now made it abundantly clear which approach we can expect.
I could leave off there, perhaps with a final wag of the finger in the direction of the fools who rule, but there is a serious and important point to be made here.
The use of this latest stratagem is a clear sign that the U.S. government is now in desperation mode and that, behind the scenes, things are serious. As its subterfuges are uncovered and revealed for all the world to see, in no small part thanks to the miracle of the World Wide Web, the credibility of the U.S. government among those being asked to finance our bone-crushing deficits will quickly dissipate.
This is backroom dealing at its most base level – and confirms why it is that the Fed is so reluctant to have its books audited.
It’s a scam, and a shameful one at that. Like the hired shills of a Monte game, the primary dealers are working with the government to pull off the charade that all is well, but they are doing so only to curry political favor and to pad their own nests at the expense of taxpayers.
There is, I believe, retribution coming. I cannot say with any specificity when it will come, or what form it will take when it does. But it won’t surprise me in the slightest if the American political class and its ardent supporters wake up one fine morning in the near future to find the equivalent of pitchfork-wielding mobs at the gate.
Meanwhile, be skeptical – very skeptical – about anything the government says or does. At this point, you can’t rule out any desperate act. The talented folks at The Onion picked up on that theme with a great spoof piece on the government repudiating its debts by staging a faux coup. Watch it here <http://www.theonion.com/content/video/u_s_government_stages_fake_coup?utm_source=videoem bed> .