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Thursday, May 14, 2015

The Fed Encouraged Packing TNT round the Blazing Ponzi Fire-Pit - The Impending Explosion is no Accident

Today, I explain why the Fed's rate-hike hype is simply ludicrous.

But to begin...a quick definition of a Ponzi...Ponzi schemes occasionally begin as a legitimate "business", until the "business" fails to achieve the returns expected. The business becomes a Ponzi scheme if it then continues under fraudulent terms. Whatever the initial situation, the perpetuation of the high returns requires an ever-increasing flow of money from new "investors" to sustain the scheme.

The chart below shows the growth, peak, and decline of the 25-54 year old US population segment (aka, "investors").  The decline since '07 has been a small three quarters of 1%.  However, the fall in employment of this segment has been a disproportionately higher 5%...and the situation is even worse given that full time jobs have fallen even further among this segment only partly offset by the rise in part time jobs.

The reason this 25-54yr/old segment is so critical is it represents the portion of our population in asset accumulation mode (401k's, IRA's, etc.), buying homes, forming and raising families with all the consumption around clothing, feeding, raising children, etc. 

In contrast, the 55+ and 65+ year old segments are entering and inhabiting liquidation mode as they have relatively little money but are asset rich.  Generally, they look to sell these assets and downsize to smaller homes.  Their spending is generally falling in retirement and they look to social safety nets to augment their income in retirement.

The chart below shows the Fed's activities since 1980 encouraging ever greater levels of debt via lower interest costs.  Remember the Ponzi definition and consider it's impossible the Fed didn't foresee the demographic time-bomb so their encouragement of greater indebtedness was essentially packing TNT around the blazing Ponzi fire-pit.  Their credibility is at zero and so should their further responsibilities for guiding the American economy!  Their criminal responsibility should be their primary future concern.

When the chart 1 trend-lines of the core population and growth in employment were broken...consumption (chart below) fell across the board from total oil consumption to mortgage debt, etc..

Population Source; OECD, Main Economic Indicators; Oil Source; IEA; Mortgage Debt Source; Federal Reserve System; Federal Debt Source, Dept. of Treasury
And markets swooned without the inflow of new investors and consumers.  The chart below shows the '08-'09 fall in equity and housing prices...and my, what a recovery since despite the recovery of 25-54yr/old employment?!?

Employee Source, US Bureau of Labor Statistics; Salary/Wage Source, US BEA; Real Estate Source, Federal Reserve System, Z.1 Financial Accounts; Equity
In lieu of markets determining supply and demand and allow prices to find a balance...the Federal Government ran massive deficit spending doubling total federal debt in 7 years. 

And the Federal Reserve bought the newly created Federal debt to ensure interest payments for the government (and the private sector) debt would pose no impediment to incurring further debt.  The chart below highlights the 100% increase in debt vs. the 15% increase in interest payments on the federal debt.

And nearly all Treasury purchasing has shifted to the Fed and "Foreign Held".

But what has become clear in the below chart is the "foreign held" purchasing has fallen to a select few nations not coincidentally, now with standing Federal Reserve currency swap lines.  These nations are not credible buyers and the origination of the dollars to buy the "foreign held" US debt is almost surely via the Fed.

So for 3.5 decades, rates have gone down, debt has gone up...but the peaking and falling working age population and employees has collapsed the Ponzi scheme...and the Fed's solution was to initiate a Ponzi scheme of far greater size and impact.  The net result is the below chart of Debt to GDP vs. interest rates since 1969.

Now, for some strange reason Janet Yellen and the Fed are discussing raising rates this year.  The below charts detail the implications of these potential rate hikes.

The first chart shows historical interest payments as a % of total federal Treasury debt 'til now plus three scenarios...

  1. Interest rate hikes and interest costs rising to the 50yr average as a % of Treasury debt.
  2. Interest rate hikes and interest costs as a % of federal debt, rising to approx. 2000 levels.
  3. No interest rate hikes and rates remain near current record lows

The dollar impacts of the interest rate hikes are spelled out below (vs. federal income taxes to offer some perspective of the implications).  Even a modest set of hikes would result in interest expenses consuming in excess of 50% of all federal income tax receipts.  A move to the 50yr average of interest costs would result in 75% of all income taxes utilized only to pay interest on the US debt. 

And for those who believe the Fed's retribution of interest to the Treasury will relieve the situation, please note the Fed only holds about 14% of all Treasury debt.  "Foreign held" debt is at a record 33%...interest payments generally leaving the US with no multipliers or velocity!  

And BTW, on average the US has had a recession every 7 years since the end of WWII...and it's been 7 years and the first and second quarter GDP is looking awfully recessionary!?!

So, why is the Fed talking about interest rate hikes when the timeline for these hikes would have the US raising rates directly into a likely recession coupled with skyrocketing interest payments consuming 50% to 75% of all federal income tax revenue?


  1. Is there any solution to our crushingly large national debt but hyperinflation?

    1. Yes Larry, debt deflation. Governments would prefer hyperinflation. Bankers would choose debt deflation. However, the power to choose resides with the disorganised masses.

      Should the masses 'panic' and collectively hoard federal reserve notes, we get debt deflation.

      Should the masses 'panic' and collectively rapidly exchange their currency for physical objects, then we have hyperinflation.

      Janet Yellen says and does whatever is necessary to delay the panic.

      The author of the blog, possibly, wonders why we aren't panicking yet.

      The answer, should that be the question, is optimism. Currently, most of us think things will be better in a few years time. The charts provided by Chris provide a clear indication that things will become worse. Optimism allows us to ignore reality. Unfortunately, optimism doesn't allow us to ignore the consequences of ignoring reality.

      Thanks Chris for your efforts in explaining and charting reality for us that know 'something' is wrong but aren't quite sure what that 'something' is.

    The pasted open letter has been emailed to select members of congress.  Perhaps it may be of interest to you.
    Jim Carter

    Dear Finance Committee member,

    Ms. Yellen has informed the committee the Fed is adequately audited. Are you aware that all independent audits of the Fed (including those that are included in the Annual Report to Congress) are conducted in accordance with guidelines established by the Board of Governors ?

    Are you aware those guidelines forbid auditing the $8+ trillion annual accounts derived from the auctioning of Treasury securities ? The Annual Report to Congress does not mention them.

    Are you aware the FRBNY has exclusive handling of disbursements—and receipts--from the above accounts ?    Ref. 31 CFR 375.3.   The U.S. Treasury (which is controlled by Goldman Sachs employees on assignment) is not involved.

    Are you aware those accounts have been alleged to be used to embezzle more than one trillion dollars annually that legally belong to the government ?     Ref.   The suit was squelched by the court on a technicality—in violation of statutory procedures. The merits of the theft have never been challenged.

    It is alleged the TBTF banks are the hidden owners of the BOG that receive the booty.

    Are you aware internal memos of Wall Street firms (alleged to be secret owners of the Fed BOG) have identified collection on the $18 trillion U.S. national debt is the “ultimate goal”? Those same firms are responsible for the economic chaos of Greece, Spain, Cyrus, Haiti and a multitude of other nations. Ref.  , NWO, Dead Ahead – among other posted locations.

    It is not the budget or financial policy of the Fed that should be the issue. It is the handling of the government's money from the auctioning of government securities that should be audited. It is submitted there is no prohibition that prevents immediate review by Congress.

    I thought you might like to know my position.


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