classical economics
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Fed Selling T-Puts?


And What If It Is?
By Wayne Jett © April 26, 2011
    Every time U. S. financial woes begin to seem measurable, if not surmountable, their scale and nature morph larger and worse. The QE2 maneuver by the Federal Reserve and U. S. Treasury still underway involves debt monetization of unprecedented scale nearly certain to destroy the dollar as international reserve currency. Now a horrible, new wrinkle has surfaced. To make QE2 appear not to affect long term yields, the Fed is said to be selling “put” option contracts on Treasury debt.  Selling Treasury puts would increase the Fed’s loss if yields rise. Is a more fail-safe plan to demolish the dollar possible?
What is a “T-Put?”
    A “put” option is a contract by the seller to buy from the put owner, on demand, a stated security at a stated price within a stated time. By selling a put on a Treasury bond, say the ten-year, the Fed will be called upon to buy the bond if interest rates rise, causing the bond’s market price to fall below the strike price.
    Having already flooded the world with $600 billion-plus in new monetary base dollars in QE2, assuring inflation and interest rates will go through the roof, the Fed will be required to create extra billions of additional dollars to perform its put contracts, exacerbating the inflation-interest rate crisis at the worst possible moment. A dollar saved will be a dollar blown.
    Is the Fed actually selling T-puts and, if so, on what terms? The answers are uncertain and cannot be learned by asking. The Fed chooses whether to answer and, if it answers, is not always truthful. Even without T-puts, dollar users risk the currency they accept for produce and assets will lose value overnight.
Effects of Monetary Practices
    The Federal Reserve’s QE2 alone is more dangerous to American interests than “Phase III” of the financial terrorist attack described in the 2009 Pentagon report revealed recently, in which terrorists were expected to dump billions of counterfeit Treasury securities into the markets overnight. Injecting new liquidity into the monetary base at roughly 30 times the average rate of 2003-2006 (when the dollar lost about half its value, from $325/oz to $650/oz of gold), as QE2 is doing and QE3-x almost surely will continue, should be sufficient to end global reliance on the dollar as a store of value. In the process, millions will suffer starvation and revolutions will topple governments.
    The Fed selling T-puts is roughly comparable to Treasury selling TIPS (Treasury Inflation-Protected Securities). TIPS pay lower yields with Treasury promising to reimburse for inflation, but federal inflation measures are suspected of dishonesty. T-puts allow markets to determine how much inflation and other risks undercut Treasury securities’ value. Treasury is almost certainly underwriting any T-put sales by the Fed, since Treasury wants to borrow without openly raising market rates on debt.
All Things Rational
    Is this any way to manage a currency, to run a central bank or to conduct national economic policy? The answers may be no, but only if the system intends to permit a middle class – a productive class – to foster prosperity, economic growth and rising living standards.
    What if, on the other hand, policymakers intend to destroy the middle class, to extinguish business competition in favor of monopoly markets, to end the stifling dictatorship imposed upon elites by the “great grey” masses of democracy, and to return to the historic two-class society of rulers and peasants? In this context the Federal Reserve’s actions are entirely rational, even ingeniously designed to achieve these ends aggressively.
The Vital, Wavering Upper-Middle Class
    Nonetheless, despite all evidence, the American upper-middle class refuses to face the reality confronting them. They insist, fully in tune with elitist media, class warfare does not exist in America. Worse, the upper-middle class falls for the false accusation that they are, in fact, “the rich” who oppress the poor and middle class.
     Despite their higher education, or perhaps because of it, America’s upper-middle class is persuaded by their relative well-being that they are, indeed, the elite. Yet few, if any, of them can get a phone call answered or returned by any congressman, much less control votes of dozens or hundreds of legislators on any selection of issues. Who among them can call and speak with a senator or cabinet official? Demanding a vote on any significant issue is generally beyond the reach of any member of the upper-middle class, even when buttressed by associated sentiments of other like minds.
     But this is not so for the dominant elite. Their indirectly conveyed wishes inexorably become U. S. federal policy. Tax earned income of the middle class, and confiscate capital left when they die. Shut down oil drilling. Shut down nuclear energy. Spend middle class tax revenues to subsidize use of corn for fuel instead of food. Shut off water to farmers. Pay for abortions to prevent birth of “the kind of people we don’t want too many of,” calling it a woman’s right to choose. Eliminate private health insurance companies and control access to health care by poor and middle class.
     Federal Reserve and Treasury policies are determined by the same dominant elite. Monetary, economic, energy, environmental and social policies mesh to transmit elitist power through American society in a highly efficient manner. Of course, the most efficient transmission of elitist power comes by designs usually called dictatorships – at least when they arise in other countries. The American upper-middle class must awake to the evidence confronting them if they, and all of us, are to prevail in our predicament. ~