Two Days to Make $300 Billion, Part I

By: The Mogambo Guru | Fri, Aug 17, 2007
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"$300 billion is...a Big Freaking Lot (BFL) of money, being almost a third of a trillion dollars in two days...or being roughly $50 in cash for every man, woman and child on the entire freaking planet in two days!"

The central banks of the world have created around $300 billion worth of new money and debt - in two lousy freaking days! And why are they doing this? Perhaps it has something to do with how Michael A. Nystrom at BullnotBull.com says that "one of the most profound comments ever to appear on BullNotBull.com" is in connection to a question about this very aspect of our "money-comes-from-debt" economic system, namely, "I have heard that if all debts were repaid, there would be no 'money' left. Is this true?"

Mr. Nystrom answers, "The short answer to this - thanks to the central bankers - is yes."

And a linear extrapolation from that is that if no new debt were created, there would be no new money! And there is a corollary with that, too, namely that inflation in prices cannot take place unless there is more new money in the system, and without new money and inflation in the system, the whole stinking American "services" economy and its stupid system of tax-crazed, welfare-dispensing, inflation-worshipping, debt-addled, asset-inflating and thoroughly boneheaded governments go down the freaking drain and take everybody with them.

And the little cowards in government don't even tax me to my face, but sneak around adding taxes and fees to things, driving up the cost of things! For example, I just got a notice from my insurance company that three new "emergency" taxes have been added to my insurance bill this year, two of them being from the Florida Insurance Guaranty Association and one from the Florida Hurricane Catastrophe Fund Emergency Assessment, for a total of $2.37. It ain't much, I'll agree, but it is the "death of a thousand cuts" of constantly nickel and diming me, all the time, nickels and dimes, with the occasional hefty pile of dollars ripped from my wallet.

And compared to that $2.37, the sum of $300 billion is a LOT of money, and I mean a Big Freaking Lot (BFL) of money, being almost a third of a trillion dollars in two days, being almost 50% of a year's increase in the national debt in two days, being almost half a year's trade deficit in two days, being almost the same as 10% of the annual federal budget in two days, being about 2.5% of total Gross Domestic Product of the entire freaking United States for an entire freaking year in two days, being the same as about 0.6% of the GDP of the entire freaking globe in two days, or being roughly $50 in cash for every man, woman and child on the entire freaking planet in two days! It's a BFL of money!

And as incomprehensibly, impossibly much money that is, incredibly, it is still less than 0.06% (i.e. down in the range of "ain't diddly squat") of the insanely gluttonous global clot of $450 trillion in global derivatives in the world right now!

You can probably get an important clue as to the import of all of this by carefully studying the way my face is contorted in fear, the way my words spill out with a disgusting spray of spittle and the way I yell so loudly that your ears are ringing and car alarms for blocks around are buzzing and blaring, their alarms triggered by the pounding, pounding, pounding of my heart at the terror of all of this astonishing, unbelievable, towering mountain of money being unleashed into the economy in just (my voice wails anew in agonized fear) "TWO LOUSY, FREAKING DAYS!"

Even worse is the possibility that all of this new money will remain as a huge addition to the money supply and to the aggregate debt level, making inflation and thus everything even worse, as Jim Sinclair at jsmineset.com says, "There is no practical method of draining this now largest amount of liquidity ever injected into the international monetary system", and that "This event will reverberate through the world financial market for years to come."

John Hussman of the HussmanFunds.com says to calm down, in that, "Contrary to the apparent belief of investors, the Fed did not shift its policy, nor did it 'bail out' the mortgage-backed securities market by 'buying' them from banks", although he admits that "the size of the operation ($38 billion) was unusual, as was the scale with which the Fed allowed dealers to submit mortgage-backed securities as collateral."

And besides, "Given that about $1.4 trillion of interest-only adjustable-rate mortgages were issued in 2005 and 2006, and hundreds of billions in subprime mortgages are already delinquent, a $38 billion repurchase operation by the Fed, where the securities posted as collateral have to be bought back by the banks unless the banks default, is hardly a 'rescue operation.'"

And as for all that new money, Mr. Hussman somehow figures that this sudden deluge of liquidity will be easily extinguished as, "What actually happened is that the Federal Funds rate shot to about 6% on Friday morning, and the FOMC brought it down to its target rate by entering into 3-day repurchase agreements."

In other words, "The banks sold securities to the Fed on Friday, and are obligated to buy them back from the Fed on Monday at the sale price, plus interest."

Well, maybe yes and maybe no, as Joel Bowman at the Rude Awakening writes, "The Fed hasn't cleared up the fundamental problem facing the credit markets. It has merely bought some time for the most distressed players. The distressed owners of mortgage securities still lack a liquid market for the formerly high-yield securities that used to be so popular."

Then again, the phrase "years to come" may still be understating the case...

More tomorrow...

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The Mogambo Guru

Author: The Mogambo Guru

Richard Daughty, the angriest guy in economics
The Mogambo Guru

The Mogambo Guru

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning, and other fine publications.

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