The only question now is "how many zeros?"
Bill Holter
forsoundmoney.com
Fannie and Freddie in the lap of the U.S. Treasury
To all; we are now entering uncharted territory. The government seizure of FNM and FRE opens up the next and terrifying chapter of the credit crunch. As I have posited many times before, this has NOW ENDED UP IN THE LAP OF THE U.S. TREASURY! The Treasury is now the backstop to all things paper. This will be a real life "Atlas shrugged". There are huge implications to this step. The Treasury will now have between $5-6 Trillion of mortgage loans added to its balance sheet. The Treasury is in a huge deficit already to the tune of $10 Trillion of funded liabilities and over $70 Trillion of unfunded future liabilities. It is over. The U.S. Treasury is broke. This will take the entire banking system with it. The banking system will need to writedown $36 Billion of Fannie and Freddie preferred stock that is carried as core capital. This means at a 6% reserve ratio, that another $500 Billion of credit must be withdwrawn to keep capital ratios from collapsing. The Treasury stimulus plan was $140 Billion [remember those $600 checks]. Now 3 times that amount will have to be withdrawn from the credit pool unless Treasury doesn't magically credit these banks with $36 Billion.
There is no telling how much the carried loans are really worth in todays market as even prime loans are only fetching .80 cents on the Dollar. This will cost at least $1 Trillion at a minimum for starters. It will all be printed. The credit rating of the U.S. will be downgraded, the interest rates the Treasury will now have to pay will increase substantially. This is so Dollar negative it goes beyond words to describe it. The borrowing ability of the Treasury is now being hamstrung by the same credit crunch that we were assured last Sept. was "contained". I'm sorry but the ruse is over. A government running a deficit can only do two things to cover the gap, borrow more or print. They can't raise taxes because that will implode the economy even worse than it already is. They will find it more and more difficult to borrow the sums needed until the auctions begin to fail. Then the "black helicopters" will be out in full force spreading freshly printed Dollars. The dilutive effect to the Dollar will be astonishing. We are entering the Weimar Republic phase. The Treasury will be crushed under debt and the Dollar [Fed] will be crushed through overissuance of new currency used to buy the Treasury debt.
Basically look at it this way, Fannie and Freddie were both having difficulty borrowing in the credit markets, they have a huge sum to refinance between now and Oct. 1, something aproaching $200 Billion. That debt could not be raised. If an auction failure occured, a panic would be immediate. So Treasury steps in to save the day. Now it is only a matter of time before the market place disciplines the Treasury by requiring higher interest rates. Once rates start to rise, questions start to arise. Questions about the credit worthiness of the Treasury, questions about how much added money supply was used [remember two years ago the Fed discontinued reporting M3 money supply]. Questions that no one would ever ask before. Real questions!
The game of chicken that foreigners have been playing with their $ reserves will come to an end. Someone will flinch. The worlds banking system primarily uses Dollars for its reserves. The other currencies used as reserves, Yen, Pounds, Euros, etc. also use Dollars as reserves. Countries are using each other as reserves in a never ending circle of falsely created values. Think of it this way, it is like two people trying to hold each other up off the ground at the same time without either touching the ground. There is no backing or foundation to any currency nor to any banking system worldwide. The last semblance of support was knocked out from under the system back in Aug. 1971 when Nixon closed the Gold window. Who will be first to sell Dollars? Who will be next? Who will be the first to flinch in this game of chicken? I have no idea, but when the $ selling starts it will snowball. It will probably destroy the entire worldwide banking in less than two weeks time once it begins. Markets will close for unspecified amounts of time, distribution, trade, travel, will all cease for unspecified amounts of time. Foodstocks will be wiped out in a week or less. This will change the world as we know it.
This is it. This is what everyone knew all along had to happen. This is what no one ever wanted talk about. We always knew that we couldn't spend more than we produced forever. This is what has happened to EVERY country and EVERY society that used FIAT paper for CURRENCY since the beginning of time. Unbacked pieces of paper never, ever, worked in the past. We as a society have made the same mistakes all over again, only this time it is not just a country or a region. It is the entire world! It is the entire world, and the world is now a bigger place than ever before.
The fiat/debt pyramid grew through the clouds until no one could see how high. There is no telling how far and wide this pyramid grew, the only thing for sure is that it was constructed upside down and is resting on its point. That point is Fort Knox. That point is in reality all the Gold stored in Ft. Knox, Denver, West Point, etc.. Even if the Gold that is supposed to be there, is actually there, the pyramids foundation is like the point of a needle. If the Gold is not there as many suspect, the foundation might as well be air. We have not had a Gold audit in over 50 years. The U.S. will have its poker hand called shortly as to whether or not the Gold is there. I believe that if the Gold IS there, you can add one zero to its Dollar price to balance the books. If it is NOT there as I suspect, pick a number. Pick a number of how many zeros will be necessary to add to Gold's Dollar price to entice a holder of one ounce of Gold to make exchange for the pieces of paper called Dollars.
We will witness the mother of all inflations and the mother of all deflations at the same time. At this point in time I guess the debate over whether markets are manipulated or not is now MOOT. The government did it's best over the last couple months to rally the Dollar and discredit Gold. The bluff that all was well and the Treasury would not have to step in to rescue the GSE's has been called. "Real" money will rise from the ashes of the banking system and will finally seek its true value. The only question now is "how many zeros?'.
P.S. and what becomes of the $1Quadrillion worth of derivatives outstanding.....? |
