Extend and Pretend: Gaming the US Tax Payer
Today, April 15th, most of us grudgingly settle our annual obligations with the government tax authorities. But for how long will we keep doing this? How long will we support the government's Ponzi scheme that makes a mockery out of the monies we have annually contributed obediently to our Social Security and Medicare accounts? What I am going to share with you may make this a haunting question for you throughout the next taxation year.
I have been writing extensively about the unregulated $605 Trillion Global Derivatives market along with the 'Extend & Pretend' Program that has resulted in an explosive market rally from the depths of the post financial crisis. Despite my reluctance, my writings and research has forced me to some undeniable conclusions. Our government is presently 'gaming' the US Tax Payer. Let me explain how.
Publication restrictions limit the words and number of graphics I can use to take you through the sordid details of what is being perpetrated; but for those that want to delve deeper, please see Tipping Points.
'WHALES MAKE WAVES'
A smoking gun is seldom found at the scene of the crime. Instead the crime must be pieced together through the linkage of clues. Clues build a case that is based on facts. Facts which can convince a jury of our peers that 'beyond a reasonable doubt' we know how and by whom a crime was carried out. Therefore I am not going to speculate. I am simply going to lay out the facts of a series of suspicious clues for your consideration that show we are being gamed.
I was an investor in Enron and was on the earnings conference calls with Ken Lay, Jeff Shilling and Andrew Fastow. I knew something was wrong with Enron's meteoric rise, but I couldn't put my finger on it and consequently I lost money. I subsequently learned during the collapse about the new world of offshore accounting and financial instruments such as SPE's (Special Purpose Entities). How companies could legally move debt off their asset ledger. A few years later, I again knew something was terribly wrong as I watched housing prices explode and witnessed kids buying McMansions and driving prestigious cars, with jobs that didn't appear to be able to support this life style. I subsequently learned during the financial crisis about the mysterious world of financial instruments such as CDS, CDO, CLO et al and the vehicles such as SIV's (Structured Investment Vehicles) that allowed banks and financial instruments to circumvent capital requirements and move debt off their balance sheet. The resulting Shadow Banking System flooded the global financial markets with cheap, highly available credit to anyone that had a pulse.
I recently discovered and have written about a whole new world of PPP/PPI, Novation Agreements and the SPC (Structured Purpose Company) and how the $437 Trillion Interest Rate Swap business has been broadly employed throughout Europe and the US at all levels of governments: sovereign, state, city and local. It is now just beginning to fill the world courts with legal proceedings and financial entanglements. This is yet another in my experience of witnessing ever increasing levels of financial malfeasants.
What has been conspicuously missing from all these examples is the world's biggest debtor.
Missing is the debtor with the most incentive to take advantage of all these innovations and creative ways to hide debt. Missing is the debtor most needing to finance ever increasing expenditures. Surely this debtor is not so pure that they have forsaken what was created in their own country because they saw the inherent risks, that they alone took the high road that almost every country, state, city or local government succumbed to. Of course we are talking about Uncle Sam here. The person we pay our taxes to every year.
SUSPICIOUS CLUE #1 - PLUMMETING US MONEY SUPPLY DESPITE QE (Quantitative Easing)
The chart above from Shadow Government Statistics is more than a little alarming. The M3 money supply reporting is shown above, which we all used to watch meticulously and was suddenly and suspiciously dropped without explanation in March 2007. John Williams of Shadow Government Statistics still rigorously tracks it. According to William's models it now went negative. This is a major concern that the M3 slope has been heading down since the 2008 financial crisis occurred, but a much bigger concern is that it has now turned negative. This means money supply as measured by the M3 is contracting. We also see that the narrower M2 measure is fast approaching that critical event. This is huge news that is receiving little attention since it is no longer published by the government. A few years ago this news would have shaken financial markets.
The demarcation from zero, means the money supply is now contracting and therefore there is less money available in circulation to buy such financial assets as US Treasury securities. Since there is less money available, it should indicate that new US Treasury bond offering would be facing lower prices and hence higher yields. Minimally, we should be seeing pressures in the bid to cover ratios in the US Treasury Auction. Surprisingly, we are not.
SUSPICIOUS CLUE #2 - US TREASURY AUCTION - Historic Direct versus Indirect Bids
With a historic and massive $1.6 Trillion of new US government debt to be financed in 2010, as tax payer on the hook for this debt, we need to listen to what is concerning those that participate in the critically important US Treasury Auction. Additionally, we need to remember besides new debt we also have roll-over of existing debt. The rollover debt is also huge because of government policy to shorten maturity duration over the last few years. This policy was meant to keep debt payments down by taking advantage of the lower shorter term rates. The US Treasury on our behalf accepted the risk and gambled against interest rates increasing. This was one way our elected officials hid the actual size of growing fiscal imbalances from 'we, the tax payer'.
What we presently find in the Treasury Auction is the professionals scratching their head and wanting to know who the mysterious Direct Bidder is.
For those who don't understand the world of Treasury Auctions, let me simplistically say there are a few key measures we watch to determine the health of the US debt market. One is the Direct to Indirect bids. Indirect Bids are the Dealer / Broker community. They are the major players that make up the volume of the transactions and who sell the debt securities in the open market. The Direct Bidders are smaller players such as the public and foreign investors, amongst others who want to avoid the broker/dealer fees and buy direct. From Suspicion #1 above, we would expect to see volume falling off. Well it isn't,
The reason is that we have a mysterious Direct bidder (or possibly more than one) taking up unprecedented auction volume and thereby achieving acceptable bid to cover ratios, which the market also watches closely.
Who this mysterious bidder is, no one is being told. There is endless speculation because if they fail to show up at the next auction, all hell will break lose. Someone has deep pockets somewhere and for some reason is buying US Treasuries. This is extremely convenient for the US government because it is presently keeping interest rates down and not allowing the Auction to fail. Remember the panic when people perceived the Greek auction bond offering would fail? This would be a thermonuclear explosion in comparison.
If you still believe in the tooth fairy, then you believe this sudden Direct Bidder emergence is not suspicious. Meanwhile, the world cannot figure out why interest rates in America haven't already vaulted higher. Most professionals are highly puzzled and perplexed.
SUSPICIOUS CLUE #3
According to a report by Bloomberg, "PIMCO's Bill Gross, who manages the world's biggest bond fund, has reduced holdings of U.S. Government-related debt, while increasing his holding of emerging market debt the most since 2008. According to a report on the Newport Beach, California-based PIMCO's website, Gross has reduced the proportion of U.S. government and related securities in the 219.7 Billion total return fund" (1). Separately, Gross said he was raising cash. This means PIMCO is selling US Treasury securities. You can only conclude they would not be the only major bond fund executing this strategy.
"Bonds have seen their best days," Gross said in a March 25 interview with Tom Keene on Bloomberg Radio. Pimco is advising investors to buy the debt of countries such as Germany and Canada that have low deficits and corporate securities with relatively high yields" ~ Bloomberg 04-14-10
Additionally, we read in the latest US Treasury TIPS report China has trimmed its holdings of US Treasury debt 1.3 percent or $11.5B in February, the fourth consecutive decline.
How could this obvious and significantly weakened demand pressure not be reflected in the bond market? Clearly, this is exactly what the professional indirect bidders are also signaling with their bidding. Magically, the auction still comes off thanks to the unknown tooth fairy. Who is this tooth fairy, what is their motivation and most importantly how is it securing these levels of debt purchases? What collateral may it possibly be pledging? (You will see in clue #6 that collateral may be very important).
SUSPICIOUS CLUE #4 - DRAMATIC COMMERCIAL BANK LENDING SPIKE
There appears to be mysteries everywhere we look, just like the days of Enron, the US sub-prime housing bubble and with Greek debt accounting.
Below is the just released Federal Reserve report from FRED (Federal Reserve Economic Data) showing the weekly loans and leases of US Commercial Banks. The highlighted spike is $421.8 Billion dollars. It occurred in one week! We need to realize that these are annualized rate numbers but it still compares in size to a monthly US Treasury Auction for example.
The questions no one will answer are:
1- Who borrowed this amount of money?
2- What was it used for?
3- What Collateral was used to secure it? (You will see in clue #6 that collateral may be very important).
SUSPICIOUS CLUE #5 - HISTORIC 10 YEAR INTEREST RATE SWAP REVERSAL
Another mystery is found in the Interest Rate Swap arena. Here we find a whole different set of professionals also scratching their heads and wondering what has caused the 10 Year Swap spread to invert. This is highly unusual to say the least and begs many questions that few have the answers to. I discussed the significance and possible reasons for it extensively in Extend & Pretend: Hitting the Maturity Wall. I will not speculate why in this article, because we are only dealing with the facts in our clues in this set of mysteries. I do however encourage you to read the broader context of what hitting the maturity wall means and additionally what reverse gearing means, laid out in Sultans of Swap: Fearing the Gearing.
"The issuance of UST debt is dwarfing Libor-related issuance. For example, we expect UST net issuance to be $1.7T and net issuance of MBS to be zero. Thus, the relative issuance of UST's vs. Libor-based products mainly accounts for the inversion in swap spreads. This is a first sign of stress leading to higher UST yields and is not to be missed." (3) ~ Morgan Stanley
SUSPICIOUS CLUE #6 - HISTORIC & UNPRECEDENTED TRANSFER OF FUNDS
Another mystery and the one that I personally find the most fascinating, is found in a US court legal proceeding. This court case is one that absolutely no one in the mainstream media wants to talk about. It is involves the transfer of $4.2 Trillion from US Trust Funds to the US Treasury. Though the amounts seem preposterous they are in fact the amounts of money the US Treasury would need as Collateral to support the potential changing collateral requirements on Interest Rates Swaps, if they were to approximate those held by Greece and other governments who have participated in the $437T Interest rate Swap market. I encourage you to read the letter to the New York Attorney General concerning this complaint.
SUSPICIOUS CLUE #7 - GOLD MARKET MANIPULATION CONFIRMED IN CFTC HEARINGS
For years now there have been accusations floating around the web that the Gold market was being manipulated. The GATA (Gold Anti-Trust Action) organization built a solid case but it remained open to debate. That ended on March 25th in CFTC hearings. Andrew Macguire, a whistleblower came forward to testify. It has the web wheeling with interviews and articles. What is important to recognize is now we have the facts that the physical gold (and silver) precious markets are disconnected from their true values. It is being manipulated.
April 9 - Max Keiser at On The Edge interviews GATA treasurer/secretary Chris Powell.
April 8 - Chris Waltzek at GoldSeek Radio interviews GoldMoney founder and GATA consultant James Turk.
April 7 - Ted Butler at SilverSeek: "A Time to Act."
April 7 - Eric King at King World News: Roundtable interview with father and son independent traders Harvey and Lenny Organ and GATA director Adrian Douglas.
April 7 - Huffington Post: Bill Murphy responds to Warren Mosler on Gold Lending.
April 5 - Peter Brimelow at MarketWatch: "Paranoids have enemies, radical gold bugs have Wall Street".
April 4 - Scott Smith at The Daily Bell interviews Bill Murphy of GATA.
April 3 - Geena Paul at CommodttyOnline::"Will fraud lift gold prices to $10.000/ounce?"
April 1 - Max Keiser reports on "CFTC, LBMA Incompetence, JP Morgan Gold, Silver Manipulation "
March 31 - Eric King at King World News: Roundtable interview with GATA board members Bill Murphy, Chris Powell and Adrian Douglas.
March 30 - Eric King at King World News: Independent trader and "whistleblower" Andrew Maguire and Adrian Douglas of GATA discuss the CFTC-sponsored public hearings on position limits in metals futures trading.
March 25 - Bill Murphy's statement to the CFTC.
March 25 - Adrian Douglas's discussion of the Ponzi-like gold trading on the London Bullion Market Exchange to the CFTC.
March 23 - GATA board member Adrian Douglas release "smoking gun" report on manipulation of the gold and silver markets.
When President Richard Nixon took the US off the gold standard in 1971, the US dollar officially became a fiat currency. There are no longer any limits to how much money and credit the US government can issue. However, the practical limiting factor would be the level of inflation associated with this money printing. The price of gold would reflect these actions because the US dollar was no longer pegged to it.
For the expansion of money supply to occur at ever increasing degrees, then gold prices would need to be controlled or it would affect the bond market and bond yields. We have come full circle and end up back at the bond auction as previously discussed.
Therefore, these recent developments in the precious metals market are critically important.
The reason for it likely occurring now is because of the levels of gold derivatives speculation presently occuring. The underlying physical gold is disconnected from the paper trading of gold. For some time now physical gold (if you can actually take receipt of it) trades at higher prices than the paper representing it. There are 100 to one volumes of derivatives presently trading to the actual value of physical gold. As Jeffrey Christian, Founder of the CPM Group and publisher of the Annual Gold Yearbook testified at the CFTC hearings, these are the same levels of physical to derivatives as seen in the currency and treasury markets. This suggests gold & silver are actually financial assets as opposed to simply commodity assets. This is why their control is integral to controlling bond yields.
You can't control gold prices without the successful implementation of the Gibson Paradox which brought Larry Summers to the forefront of useful academics from which the banking industry sponsored him as US Treasury Secretary. When Larry Summers joined Robert Rubin at the US Treasury, the gold manipulation speculation began.
I can quite easily string all these 'clues' together into a very sound and convincing argument of specifically what is transpiring here. However, I am not going to do that because it would be considered speculation and additionally would make this article much too long. Instead, I will leave that to you shrewd reader as we wait and watch for further clues. They will surely be evident to the watchful eye. For those who wish to speculate I encourage you to check out my analysis, complete with block diagrams at Tipping Points.
If you never saw the collapse of Enron coming, nor saw the financial crisis coming, nor saw the European PIIGS crisis coming, let me point out that you now have all the clues available for you to see something of horrendous proportions coming. Like these events previously, we likely will learn about a whole new set of financial instruments built upon the already long list of financial engineering acronyms we have come to learn about.
This is not some board game like the old kids' "CLUE" game where we discover it was Professor Plum, in the Library with a Candlestick. This is however a game that the government is playing with our money. Remember, this is both our money and our debt obligations they are obligating on our behalf. We will be asked to pay through our future taxes.
What is coming may change your perspective towards paying the dramatic increases in your taxes that are also coming in the very near (post mid-term elections) future.
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(1) 04-14-10 PIMCO's Gross Lowers U.S. Debt Holding Benzinga
(2) 04-14-10 Pimco Boosts Holdings of Emerging Debt Bloomberg
(3) 03-27-10 Are Banks Getting Crushed Due To Negative Swap Spreads & The $154T IR-Derivative Market? Zero Hedge
(4) 04-07-10 Nearly half of US households escape fed income tax Yahoo News
(5) 03-25-10 Jeff Christian's CFTC Testimony
(6) 04-15-10 China trims holdings of US Treasurys by 1.3 pct Associated Press
The last Extend & Pretend article: EXTEND & PRETEND - Manufacturing a Minsky Melt-Up