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Monday, September 23, 2013

How the Fed works: An Attempt to make it Understandable to a 10 yr old..

We ran across this header on a site called CNS News:

'$3.39T Quantitative Explosion: Fed Owns More Treasuries and MBSs Than Publicly Held Debt Amassed From Washington Through Clinton'

MBS are Mortgage Backed Securities or more specifically ''toxic' mortgages

"Since the beginning of September 2008, in fact, the Fed's ownership of Treasury securities and MBSs has increased seven fold.

As of the close of business Thursday, the Fed said, it owned approximately $2,052,055,000,000 in U.S. Treasury securities and approximately $1,339,771,000,000 in mortgage-backed securities—for a combined total of about $3,391,826,000,000 in Treasury securities and MBSs."
We keep trying to explain what's going on and to do so in as clear-cut easy to understand manner as possible and because we keep thinking we're failing on this due to its complexity, we're going to try again..

So those readers who already know all this, you may still want to read as a refresher..

Or not..

It's really up to you..  We provide the information..  You're still free to choose to acquire it..

OK.. so we begin our latest attempt at simplicity:
Many nations own portions of US debt.  For instance, based on figures from October 2010, the United Kingdom owns $478 Billion in US Treasuries with Luxembourg owning at the time $78.5B

Owning Treasuries means owning Bonds essentially.

Government sells IOUs to others to be paid back over time with different interest rates in exchange for getting immediate money to pay out other IOUs come due.

Ex: John borrows $5 with interest from Anne so he can pay back the $4.75 with interest he borrowed last month from Beth.   Next month he will borrow $$ to pay Anne back.. etc..
OK.. let's continue..

As of Oct 2010, the largest foreign nation holding onto US Treasuries i.e. debt was mainland China with $907 Billion followed closely by Japan owning $877.   The combined amount comes to $1.784 Trillion

The Federal Reserve as of this moment holds approximately $2,052,055,000,000 in U.S. Treasury securities, which is give or take $300 billion more than China and Japan combined.

See why we can never Ever default?   We'd be doing so to ourselves..

Now..  How does the Fed, which is a private entity by the way..  How does it get the $$ to buy these securities?
Answer:  It prints the necessary money it needs to spend; it creates this money out of thin air.

And what is new money created from nothing really called?

New debt.

Every dollar printed is a dollar borrowed but its not the Fed who pays back this obligation..  Nope its the taxpayer.

So in simple terms, the everyday person with their heads in the sand or between their legs is paying two times over.  Through higher taxes, they pay towards maintaining the debt and reimbursing the Fed's expenditure.
We pay for that artificial market and ownership of those worthless toxic mortgages.

OK, still with us?

Let's move a little more forward before wrapping up..

When the Fed is buying these mortgage securities, the questions to ask are 1) Why? and 2) What is the valuation they are paying?

Answer #1.. They're buying the crap to help liquidate the drowning banks who if forced to acknowledge mark to market its real valuation, would take down every major bank in this nation.
So they are stepping in as the sole buyer of junk worth pennies on the dollar.

This leads to answer #2..  What is the valuation being paid?

100 cents on the dollar.

So in simple terms, think of it like an auction where there's one bidder constantly outbidding him/herself purposely to 'feed' the seller the most money possible for something understood to be utterly worthless.
Remember, the #1 goal for the Fed... the primary purpose for its existence is to always come to the financial rescue of the banks.

So to use that auction example, imagine your loved one was in financial need and you couldn't simply hand them the $$ needed for survival, so you do a 'back door'.. you buy all their possessions, purposely overpaying until the person you want the $$ to go to has enough to stand on their two feet.

This is why the Federal Reserve is so evil.  It gives the illusion of being part of the government.  The President nominates someone every four years and there's monthly visits to Capitol Hill and obligatory speeches or reports to release..

But its as 'Federal' as Federal Express.
So $3.391 Trillion.. and that doesn't count next month's $85 billion.. or the following month..

And it doesn't count the Trillions secretly funneled to foreign banks, other central banks such as the ECB and corps around the world...

And the populace is really clueless.  

They will argue with the teenager behind the fast-food counter if they didn't get exact change on their Whopper Jr. or proper points were not assessed on their rewards card...
And this..The Fed..  All This...  just too big to comprehend

And don't think the Financial Elite don't know all this..  Its why they can be so transparently out in the open.

Lesson:  Don't sweat the small stuff.. Focus on the bigger picture.