classical economics
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Straws in the Wind 2010
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By Wayne Jett © January 6, 2010

Not Enough Dollars Out There?
    The People’s Bank of China recently warned that, as large as the U. S. current account deficit is, it is dwarfed by the U. S. fiscal deficit created by presidential and congressional spending. American spending abroad does not provide foreign central banks (China’s included) sufficient dollars to buy all of the debt securities the U. S. Treasury intends to sell in 2010. Even if China and other countries continue buying Treasuries with all their dollars, private buyers must buy a lot of Treasuries if the U. S. government borrows as much as it wishes to spend.
    That is, private buyers must be found for Treasuries unless the Federal Reserve buys all the Treasuries foreign central banks do not. The Fed has all the dollars it chooses to print, as shown during 2008 and 2009 when the Fed issued about $1.5 trillion to help big U. S. banks out of financial difficulties. Presumably, the White House, Treasury and Congress will expect the Fed to do the same for them during their own tough times.
    One minor consideration is Fed chairman Ben Bernanke’s statement to Congress that the Fed will not monetize the new federal debt. As with many such declarations regarding U. S. financial affairs, that one may be a matter of semantics. The Fed may not buy securities directly from the Treasury, but the numbers just do not add up for all new Treasury debt to be sold without new money from the Fed created for the purpose.
    This brings forward PBoC’s central point. The Fed has already issued so much new monetary base that the dollar is presently in the dangerous devaluation zone. As noted previously here and here, the Fed’s path back to dollar stability is already outside its own control, since draining excess money base requires sale of Fed assets into markets which remain subject to fraud and manipulation. If the federal government insists upon spending as presently proposed, requiring further sharp expansion of money base, the Fed truly will have no path away from destructive dollar devaluation.
    Advocates of this economic policy point to the PBoC as the “sucker” for owning so many Treasury securities, and tacitly approve cheating the Chinese. These bright people must know that middle class and poor Americans rely on dollars to store the value of their labor and production delivered in exchange. The White House, Treasury, Congress and the Fed cannot deprive the Chinese of the dollar’s value at the time of exchange without simultaneously cheating Americans.
    Historically unprecedented federal deficit spending for “stimulus,” to nationalize health care, to “green” the economy or for any purpose other than national security does far more harm than good to economic recovery. Even if private buyers minimize the sum of Treasuries the Fed must monetize with new currency, private capital invested in Treasuries is private capital kept away from the private economy. Long term interest rates will rise even as private investment shrinks. This is destructive to private economic growth, yet appears consistent with the Fed’s plan for persuading banks to keep more capital in reserves by paying higher interest rates on the reserves.
    Another possible scenario, also destructive, is described by an apparently informed observer as the actual plan of the dominant elite (he/she calls them “global elite”). Publishing anonymously, “Jefferson” says (comment #179765) the U. S. dollar will not be destroyed because its value must be preserved at some level in order to bankrupt the companies and economies which use it. Those bankruptcies are said to be consistent with the global elite’s design for world domination.
    This illustrates the challenge and futility of economic forecasting based on monetary policy. Economic and financial forecasting requires knowing the dominant elite’s subjective intent and its planned use of each policy tool, and monetary policy is only one of those tools. This is closely guarded intelligence and may be changed subjectively at any moment.
    Shrink private production while growing monopolies, especially government. This has been a central feature of the mercantilist design for dominating the middle class since at least 1880. Fed chairman Bernanke, seeking to retain maximum authority for the Fed, points to lack of regulation in the mortgage industry as culprit in the housing collapse (he calls it by its technical name: price “bubble”).   But banks, particularly investment banks, were blameworthy in the 2008-2009 debacle, and the Fed was a central player in those events, both as regulator and as financier. Expect the Fed’s misconduct of monetary policy to continue. Congress is told what to do, as is the Fed, by the dominant elite, which includes Wall Street’s players.
YRC Worldwide Barely Survived
    In case anyone doubted, the Securities & Exchange Commission remained comatose at year-end 2009, as when the year began. The once giant trucking firm, YRC Worldwide, nearly was pushed into bankruptcy in late December. Doing the pushing was not bad trucking operations but financial manipulations akin to those which destroyed major financial firms during 2008. Who saved the company from fraud? Not the SEC, but the Teamsters Union.
    Remember, 2008 was the year the SEC permitted market makers in options and credit default swaps to hedge their positions by selling short shares they did not borrow or deliver. This SEC rule (called the “Madoff exemption” of Reg. SHO) enabled proprietary trading desks of banks, investment banks and hedge funds to destroy companies by buying “put” options or CDS, knowing their derivative purchases would cause millions of phantom shares to be counterfeited and dropped on the share price of each target company.
    Yes, the SEC repealed that rule after the major targets of 2008 were destroyed. Market action apparent to the naked eye, however, has given little or no evidence that billions of counterfeit shares sold into U. S. markets were ever bought in by market makers or other naked short sellers. The counterfeit shares are still out there in retail investors accounts, and quite a few of them likely are labeled YRCW.
    YRCW, only short years ago a thriving trucker with growth prospects in China, was beaten nearly into oblivion primarily by the manipulated price of crude oil which put diesel fuel prices above $4 per gallon in 2008. When market prices of primary commodities such as diesel fuel do not act as fundamentals of supply and demand imply they should, management can be caught off base. Such events provide fully adequate cover stories for those who ply the nefarious trade of destroying companies for profit.
    Whether YRCW management actually got wise to fraudulent dilution of its share price through derivative purchases is unclear. Perhaps they did. By ridding the company of bond debt, YRCW could remove the crucial link by which CDS buyers would profit by bankruptcy and default by YRCW.
    What is clear enough is that management saw the need to restructure YRCW capitalization because the company could not service its bond debt. Buying back the bond debt was not an option because the YRCW share price was too low to raise capital, and cash was precious due to economic conditions. So YRCW offered 90% of the company’s equity in exchange for their bonded debt. This seemed fair to bondholders, because bankruptcy would likely pay them nothing as large truckers do not produce large amounts of cash in liquidation these days.
    But hedge fund managers can, and often do, read proxies for bond transactions, so they knew the percentage of bonds outstanding which must approve such an exchange of common shares for bonds. By appearances, hedge funds which bet big (by buying CDS) on YRCW default proceeded to buy sufficient YRCW bonds to block approval of the exchange for common shares. By assuring default on the bonds, the hedge funds would collect many times what they paid for the bonds by cashing in the CDS “insuring” against default they had caused. They sharpened their knives and broadened their smiles, preparing to feast on the YRCW carcass.
    Then up jumped the devil (an angel for YRCW) in the form of James Hoffa, Jr., president of the International Brotherhood of Teamsters. Hoffa called out Goldman Sachs and certain hedge funds for their efforts to destroy YRCW and 50,000  truck driving jobs, and offered to picket their offices. Goldman denied any position in the affair, of course (as usual, “trust us on this”), but suddenly those hedge fund bondowners  actually answered their phones and approved the stock-for-bonds exchange. A near-miraculous last-minute win for YRCW, its employees and shareholders.
    Multiply this hell-hole experience a thousand times over and you may approximate the fates of many publicly capitalized and traded companies during the past decade and particularly the past two years. Picture your company in YRCW’s position, except without the Teamsters’ Hoffa in your corner. That is how the world has looked to many CEOs, boards of directors and shareholders in this worst of all eras in the SEC’s pathetic history.No wonder the world’s largest producer of aluminum chose to raise capital with an IPO in Hong Kong, not New York.
    Let’s take an optimistic view of the coming year. Maybe the Teamsters will decide it’s not fun anymore to have its pension funds regularly plundered by the Wall Street crowd. Maybe the Teamsters will speak to Congress about it. After all, what sense does it make for pension trustees to be legally liable as fiduciaries for prudent investment of pension funds when the SEC looks the other way or even assists the manipulative destruction of publicly traded companies?
A Small Shortage
    In early December, 2009, a certain 2005 Ford Expedition (Eddie Bauer) in Los Angeles County was diagnosed as having a defective fuel pump. The auto repairer, in business at the same location 20-plus years, had difficulty getting a replacement pump. He found one, he thought, for $1,100-plus installed, but then it didn’t exist. He found a “used” fuel pump, taken from a junked SUV of the same description, and installed it for $650-plus, but it proved defective.
    By this time, the vehicle owner was about two weeks into the ordeal and insisting upon urgent action. He called local dealers (the nation's largest is local); no luck. He searched the internet, found an auto parts supplier, found a new pump fitting specs, and then verified by phone the supplier had the fuel pump in stock (“the last one”). He paid the price, and for overnight delivery. Next day, the delivery never came. Another phone call learned the supplier  had only expected to get the fuel pump in, but didn't.
    The Ford owner emailed a personal friend, a Ford executive, and received suggestions that he do what he had already done. More contacts with auto parts suppliers in the Midwest find the earliest possibility of a replacement fuel pump is about January 15.
    This is extraordinary. A major vehicle (hundreds of thousands sold) produced by Ford, the only U. S. auto manufacturer which did not go bankrupt or out of business, cannot be returned to service within a period of six weeks. A new 2005 Ford Expedition cost between $33K and $46K. When one replacement fuel pump cannot be found nationally for a nearly new Ford SUV, you may be certain this single SUV is not the only one needing a fuel pump.
    Perhaps this is a small matter, an aberration in an auto service system which performed well for a century. Maybe production of fuel pumps will flow again next week. If not, this lack of a fuel pump is akin to “for lack of a nail a shoe was lost …” which led to a kingdom’s fall. It signals a sharply reduced standard of living for Americans, approaching faster than almost anyone imagined. Empathize with those in Mexico and Europe subjugated for generations by mercantilist dominant elite. ~