Pic credit: David Dees

I love Gary North. Love, love, love. I love most of what comes out on Lew Rockwell's site simply because spending hour after hour skimming central banker babble to make sense of it can drain a girl and it's nice to read the thoughts of great writers who not only know how to spin a tale but know exactly what they are talking about.

I am of the school that believes for one to truly grow, it is imperative to spread your opinions around. I don't hang out with a gang of conservatives for that very reason (well, that and the fact that I'm surrounded by dirty tree-hugging liberal freaks out here in SF) as thoughts and beliefs should be like investments; the more diversified one is, the better off one will be in the long run. But Gary North's thoughts are almost always perfectly aligned with my own, and there is absolutely nothing wrong with that either.

Case in point: Bankers are Scared. Are You?

If you are not, you should be. I don't mean you should panic and start freaking out, I mean reasonably afraid of what is to come. If you are of the ilk smoking up the green shoots, you might end up lost when the shit hits the fan. Just sayin.

Take it away GN:

Since September 2008, the Federal Reserve System has approximately doubled the monetary base. It has bought T-bills and Fannie Mae and Freddie Mac debt. It has lent newly created money to buy toxic assets from large American banks. It has loaded up on assets, creating new money to pay for this. Its balance sheet is twice as large.

Yet this money is not flowing into the economy. It is flowing into the banks, but the banks are parking it with the Federal Reserve System. The FED pays them the going rate for overnight money, something in the range of one-tenth of one percent. This is not what I would call a compelling rate of interest. Yet, for bankers, it is very compelling. They prefer to lend this money to the FED, which refers to this money as excess reserves, rather than lend it to producers or consumers.

"Wait a minute," you should be thinking to yourself. "If the banks pay 2% to depositors and then turn the money over to the FED at a tenth of a percent, the banks will be bled dry. They can't make it on volume."

Banks are walking away from far higher rates of return. They are carrying the existing system by lending to high-interest borrowers who still use their credit cards, but only if the borrowers are making their monthly payments. But banks are no longer willing to lend most of their post-September legal reserves to the general public. They prefer to let the FED sit on the money. They are walking away from the interest they could earn on a trillion dollars of available reserves.

This is unprecedented. It is happening all over the Western world. Commercial bankers are not lending the reserves that central banks have made available to them through massive purchases of debt. The banks bought the debt. The recipients – when not banks themselves (toxic asset sales) – deposited this money in their banks. The banks then turned the money over to the central banks that created it.

The fractional reserve multiplication effect has broken down. The money multiplier isn't multiplying any longer.

Yes, yes, and yes. House of cards falling, anyone? The delusional belief that banks are safe and your money too is a lie. A poorly-executed one at that. What's worse is that investors are buying it and leaping head first off the diving board into the shallow end of the liquidity pool. Sure, everyone wants a place to stick their money, even in Bizarro World, but hallucinations are not reality. We are collectively tripping our balls off. Wait! It gets better!

This is good news for central banks. They have been able to fund a financial system that came close to crashing last September. They have been able to re-capitalize the largest banks, which were facing bankruptcy because of bad loans to over-leveraged hedge funds. The primary purpose of every central bank is to preserve the banking cartel by protecting the largest banks. These are the multinational banks.

This is not the official purpose of central banking. For example, the two-fold official purpose of the Federal Reserve System is to maintain high employment and the purchasing power of the dollar. This is public relations fluff. The dollar has depreciated by over 95% since the FED opened for business in 1914. This is revealed by the inflation calculator of the Bureau of Labor Statistics, a Federal government agency. The unemployment rate has always fluctuated wildly in recessions. The recession of 2007–9 is no different. [my emphasis]

There have been some major bank failures and a few dozen local bank failures. The FDIC has depleted its reserves of T-bills. The Federal Reserve and the Treasury have subsidized these liquidations. The losses continue anyway. Commercial real estate is plummeting, and will produce hundreds of billions of dollars in losses for commercial banks. The residential housing market continues to plummet, with waves of mortgage re-sets scheduled for 2010 and 2011. There is end in sight.

But the FED has kept the largest banks, now gutted, from going under. It has done this by doubling its balance sheet.

This balance sheet serves as legal reserves for commercial banks. Because commercial bankers are petrified, they are not lending to the general public. They are lending to the FED. This has enabled the FED to achieve half of its two-fold assignment: preserve the purchasing power of the dollar. The Consumer Price Index is down slightly over the last 12 months. It only rose by a tenth of a percent in 2008 – the lowest in over half a century. The Median CPI, which I have used for many years as a better guide than the CPI, is in the 2% to 2.5% range. It is low, though not so low as the CPI.

And this is where we come to the great Fed balance sheet unwind. The Fedheads assure us that they have a plan, a trick up their sleeve, a keen eye trained to pull out as soon as they see the first sign of trouble. We can therefore assume that they have absolutely no plan whatsoever as they are too busy trying to keep the wheels on the machine. Keeping up appearances and all.

Let me tell you a story, dear reader. Come closer. You can sit on my lap if you want but no funny business, I'm not *that* kind of girl.

My grandmother, bless her heart, grew up in the 40s, piss poor and charged with the duty of raising her brothers and sisters after her mother died when she was young. I have heard countless tales of her being forced to live off mayonnaise sandwiches while she worked crappy waitressing jobs in high school. My grandmother also believes that there's nothing wrong with Socialism and more American youths should be forced into service for their country. Oh well. Gotta love her.

Anyway, my grandmother is of the original "don't ask don't tell" generation.

Lucky for me, I spent a large part of my own youth growing up in her home. And while I was shaving half my head (sorry, it was the 90s, what can I say?) and causing havoc for my poor grandparents, I will never forget her famous line. I'd launch into some long dramatic teenage rant and her response would always be "shhh! Keep it down, the neighbors might hear you!"

It didn't matter if what I was saying was true or not, it didn't matter if my entire world was falling down around me. All that mattered was that the neighbors never found out what was going on behind closed doors. Keeping up appearances.

That is all this is. Must keep up appearances. Don't let the neighbors find out. Send Geithy to China and convince those Communist pricks to keep buying our debt. Smile on the stage and tell America everything will be okay.

What worries me the most about all of this is that I honestly believe the Fed is not only lying to us but lying to itself. They don't have the slightest clue and are too narcissistic to admit as much. Fine, don't tell us but please at least be honest among your own seedy organization. Not quite.

They don't have a clue and we are headed for disaster, regardless of which metric you use to measure this. There is no Plan B, no balance sheet unwind, no heading off inflation. They can't even see T-bill yields as a raging red flag. So? We've got a stimulus to fund, keep buying!!

Obviously I have never been a fan of central banking. But this version of central banking? It is a farce, a crime, and a plague on the future prosperity of this country. We are now indebted to the Fed to the tune of $14 trillion though they still refuse to tell us where that money went - so what do you think, even if we kill the Fed and cancel 1913's Federal Reserve Act they are just going to let us walk away from that large a debt?

Modern day slavery, kids. Welcome to your "new normal." Are we sufficiently pissed off yet or do I need to keep yelling?