Wednesday, January 5, 2011

Market Update: Is the U.S. Federal Reserve Running a Real Estate Ponzi Scheme

In the Corporate world running two (2) sets of books and hiding the ball in what is commonly referred to as a shell game or "Ponzi Scheme" gets you a one way ticket to prison. There is no diplomatic immunity.

However, as we have come to realize, the U.S. Federal Reserve not only has diplomatic immunity, its books are not able to be audited and they are allowed to run multiple sets of books.

How can they do this one may ask? They have one set of books for the "defunct mortgage backed securities" plaguing the U.S. Economy which also included other "junk collateral" which they have lent one hundred cents (100) on the dollar or given full value loans for every dollar of face value securities presented to them by financial institutions, hedge funds, insurance companies, etc.

Then they have a second set of books whereby they conduct their more customary open market activities by purchasing U.S. Treasury securities and other corporate debt instruments.

Now the problem with running two sets of books in this manner is that the treasury and corporate book is fairly representative of market value. The mortgage backed securities and other junk book is massively overvalued on the Federal Reserves books, and thus the loans that financial institutions, hedge funds, insurance companies receive to keep them afloat is in essence done at price levels that in the private sector that would be considered fraud or Ponzi.

Where does all of this lead us in an economy where the underlying collateral that the U.S. Federal Reserve continues to lend one hundred cents on the dollar against continues to decline and is projected to continue declining for years, while the financial institutions, hedge funds and insurance companies continue to get full value on virtually zero interest rates?

A double dip recession for starters, which is already upon us as the U.S. Economy is living off of borrowed money from the U.S. Federal Reserve, which is living off of borrowed money from the U.S. Treasury, which is living off of borrowed money from foreign investors in U.S. Treasury securities. Yes the U.S. Federal Reserve is indirectly running a Ponzi scheme to keep the U.S. Economy afloat.

This goes beyond a ticking time bomb; this is building up to a catastrophic economic event for the U.S. Economy as the U.S. Government via the U.S. Treasury and U.S. Federal Reserve have put the overall Real Debt/GDP to unsustainable all time historical high levels.

All Ponzi schemes end in tears and the U.S. Real Estate Ponzi scheme is creating an economic hole of monumental proportions and one which we have no conceivable idea how the U.S. Federal Reserve can fill.

Our recommendation is not to scale back, it is to run for your economic life. The economic purge forthcoming will make 2008 look like a light appetizer. This is unfortunately what happens when the U.S. Government plays hide the ball, facilitates the shell game and ultimately runs a Ponzi scheme by default.

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