Is the US Fed a terrorist organisation? - The Honest Truth By Ajit Dayal
» INVESTING IN INDIA  
Investing in India - Honest Truth by Ajit Dayal
Is the US Fed a terrorist organisation? A  A  A
PRINTER FRIENDLY | ARCHIVES
18 AUGUST 2011

There are two kinds of terrorist acts.

There are the increasingly frequent terrorist attacks which make the loud bangs that blow up buildings and bridges which leave blood and limbs on the streets.

And then there are those very subtle but persistent silent attacks from central bankers that blow up the financial system.

Both cause a loss of human lives and loved one.

Both dislocate communities and nations.

--------------------------------------- Invest In Gold? ---------------------------------------

Could the price of Gold double from here? Or is a correction around the corner?

Join us for a Free WebSummit with Ajit Dayal to get an answer!

Claim Your Free Pass Now! Click here!

---------------------------------------------------------------------------------------------------

But the one that makes the loud bangs is condemned severely by heads of State and dealt with rapidly. The US government spends over USD 1.2 trillion on its arms and armies. Probably 30% of that is spent fighting the wars with terror groups based in the Middle East.

The other terrorist attack based on the slow poison of constant printing of money lulls us into numbness and is rarely condemned. In fact, governments praise it. Central bankers who adopt such policies get re-nominated for second terms. They get invited to gala dinners and give interviews on TV channels.


Source: a chart doing the rounds on the internet

According to Wikipedia, the "Terrorism" comes from the French word terrorisme, and originally referred specifically to state terrorism as practiced by the French government during the Reign of terror. The French word terrorisme in turn derives from the Latin verb terreo meaning "I frighten".[11] The terror cimbricus was a panic and state of emergency in Rome in response to the approach of warriors of the Cimbri tribe in 105 BC.

The depression is coming, the depression is coming

I can picture the Romans in 105 BC. The Cimbri tribe are seen on the outskirts of the city. The alarm bells ring. There is panic and the rulers of Rome, sworn by the gods to protect their subjects, declare a state of emergency. They know what is best for the people and how best to deal with the Cimbri tribe.

And maybe the rulers of Rome were really smart and did know what was the best thing to do and maybe they beat the attacking hordes away and saved their citizens.

Or maybe their victory was pure luck.

Or maybe the Cimbri tribe got diverted to some orgy and decided that a wild party with 16-year old girls hosted by some Berlusconi dude was more fun than a brawl in the dusty streets of Rome.

Whatever be the reason, the Romans won and the rulers of Rome portrayed their victory as a demonstration of their skill. That victory allowed them to perpetuate the myth of their powers.

The Pavlovian equivalent of the bell and the salivating dog was discovered.

Every time there was some dust on the horizons, the Roman kings shouted "Cimbri", created panic, and declared a state of emergency. And the people cheered on.

But history never sits still. It must change and adapt to suit the times.

The Fed, mandated to maintaining the stability of the US Dollar, seems keener on destroying it. And every time it has a choice of preserving the value of the US Dollar, it shouts "Depression", paints a picture of fear and terror, and prints more money.

The maestro creates the famous "Greenspan put"

The first recorded hijacking of a plane was in Peru on February 21, 1931. Until then, planes were used to transport people and goods. But once the genie is out of the bottle, there is no way to shove him back in. Now the terrorists use planes as weapons and as political statements.

To be fair, some politicians still use it for productive purposes - like flying to New Delhi to ask for advice on how to run their states.

But central bankers, like the terrorists of the loud noise kind, have also evolved in their role with the use of new tools and weapons. The central banks were given the responsibility of preserving the value of a currency for the benefit of the masses. Instead, many have mastered the act of destroying the value of currencies and focused on protecting the wealth of a favoured few.

So in 1998 Alan Greenspan, the then head of the US central bank, used the potential bust of LTCM - a hedge fund co-founded by two Nobel Prize winners, Myron Scholes and Robert Merton - to shout "Cimbri".

Alan Greenspan, the maestro and the darling of the CNBC crowd, realised that the USD 100 billion owed by LTCM to the large financial firms would make them all go bust. Prior to Russia reneging on its debt obligations in 1998, LTCM had a debt-equity ratio of 25 to 1. After its net worth eroded due to the lost "bets" based on quantitative models, the debt-to-equity ratio surged to 250 to 1.

On the other side of the trade - those that were owed the USD 100 billion which they would not collect - were the usual suspects (see Table 1). Rather than letting the course of evolution take its own path and pushing the Ph.D.'s, MBAs, and economists to a below poverty line existence on some rural farm, Alan the Roman shouted "Cimbri".

Here is a commentary on the Greenspan rescue of LTCM from Wikipedia: "He came to the rescue of the Wall Street hounds and hosted a tea party on the 10th floor of the Federal Reserve of New York office building to ensure that the creditors became the owners. It was a sleight of hand that was akin to allowing a suicide bomber to live after detonating his explosive laden vest. If you own something that owes you money, it cannot be classified as a bad debt because you owe yourself. And, hence, no loss and no write-down of equity. A stroke of genius indeed."

Table 1: This is what they paid to own LTCM - the company that owed them money.
$300 million Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs,
Merrill Lynch, J.P.Morgan, Morgan Stanley, Salomon Smith Barney, UBS
$125 million Societe Generale
$100 million Lehman Brothers, Paribas
Source: Wikipedia

Bear Stearns declined to participate (Note: some say that this incident is what made the angry Fed allow this company to go bust. Moral: never mess with a terrorist?)

But just as the first hijack created a long list of me-too copy-cats, the rescue of LTCM created a whole new breed of risk-takers. If LTCM could go bust and if Goldman, Morgan, Merrill (and others on the wrong side of the trade) could be rescued, then there was no doubt that such a rescue would happen again. Provided you are big.

The genie is out of the bottle. You cannot put him back in.

If my father is the richest guy in the country and if I am caught copying some fat kid's homework and I know that my father will send a cheque to settle the problem, then there is a very high likelihood of me copying that fat kid's homework every day. Provided my father has that stock of cash in the bank.

The rescue of LTCM led to the birth of the "Greenspan Put". Take a big bet; if you make money then you keep it. If you blow up the world, just create some dust on the horizon and nudge your friendly central banker to cry "Cimbri". You will be rescued. The poor Roman citizens will be too scared to challenge anything.

Bernanke stands up to the job

So, the central banker in the US has evolved into the Pavlovian dog. Every time there is a fraud or bankruptcy on Wall Street, there is a yell of "Cimbri" and there is a rescue.

In 1998 it was LTCM and they rescued the usual suspects. In 2000, they found out that these Wall Street firms were writing "buy" notes on stocks that they were internally calling a pile of rubbish that even their dogs would not discharge their waste on. They could have shut them down but, hey, "Cimbri" is easy to shout.

By 2003, they found that the mutual funds in the US were not treating all clients as equal and favouring a few - at the cost of the other clients. They could have shut them down but shouting "Cimbri" was easier.

By 2007, there was the larger fraud of selling home loans to those who could not afford to buy homes - and then selling of those low quality mortgage securities (after getting the dumb cousins at credit rating agencies like Moody's and Standard & Poor's to rank them as high quality) to unsuspecting buyers. Yes, you guessed it, rather than putting the crooks in jail, the Fed shouted "Cimbri" and gave USD 150 billion in direct salaries and bonus to Wall Street employees while the rest of the American public took a pay cut or lost jobs.

The financial terror is home grown; there is no enemy in the horizon. There was no dust cloud as they gathered to storm Rome. No, that dust cloud was actually the signs of them making off with the loot they had just stolen.

How many people do you think must have died from these financial attacks? How many families must have been devastated? How many must have lost their savings, their children's education money, their retirement money, the money they needed for some life-enhancing operation?

--------------------- Do you like the "Quantum way"? ---------------------

If you've been reading the Honest Truth and like what Ajit has to say, we are sure you would be pleased to make our acquaintance.

We are, Quantum Mutual Fund, a fund house that works on a set philosophy - the same philosophy reflected in the Honest Truth - Non-commissions, Transparent Costs, Basic Products, Long Term Investing!

Give us a chance to know you better. We're just a click away!

--------------------------------------------------------------------------------------------

After each crisis, the Feds have printed more money. And each time they printed money, it led to inflation. And at every price rise, more people became poor because they needed more dollars to buy the same basket of goods.

How many people can afford milk at USD 4 per gallon? Or petrol at USD 4 per gallon? Or health insurance, or proper education for their children?

It does not matter, said the head of the Federal Reserve Bank of New York in March 2011. The price of an I-Pad has declined and it can do twice as much as it could do before.

Yes, said a person in the crowd, but I cannot eat my I-Pad.

And so families fall victim to the terrorist attacks by their own governments, by their own central banks.

But we did not hear a single sound.

There was no flash of light - no black smoke came bellying up into the blue sky.

Yet, there must have been some pain, some dislocation, and some deaths.

But that pain is mostly on Main Street - on real America. Not on Wall Street. The financial geniuses got the Fed to pump in USD 2 trillion into their blown up financial mortgages. At zero interest. And then the banks could sell this free cash back to the Fed at 3% and earn a cool USD 60 billion each year. Sure they could punt some of this cash in the Indian stock market or in Japanese yen and earn higher returns. And now their bonus is back to the pre-Lehman days.

The US government and the Fed are all set to raise the amount of debt they can issue from USD 14 trillion to USD 16 trillion.

President Obama won the election on a mandate to "change".

And change he has - he has changed himself.

My American friends call him Bush-Lite, a reference to him being a milder version of his predecessor whom he constantly criticised during his election battles.

Meanwhile, as the financial terrorists add to the uncertainty in our daily lives, buy life insurance - buy gold.

As the central banks of the world debase the paper currency we own, it makes sense to buy gold. Anywhere from 10% to 20% of your savings should be in gold. Consult your financial advisor, understand your needs and consider investing in gold for the next 10, 20, 50 years....not with a 1-year view. How slowly or how quickly you should buy gold will differ for individuals. But gold is a currency that has maintained its store of value over long periods of time. Right from the days when the Romans shouted "Cimbri".


Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


Read our Privacy Policy and Terms Of Use.
Get The Honest Truth directly
in your mail box.
Just enter your e-mail address» 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Is the US Fed a terrorist organisation?". Click here!

6 Responses to "Is the US Fed a terrorist organisation?"

Dharm Deo Sharma

Sep 28, 2011

Mr Ajit,How will you make money from Indian market,which goes up only when there is hot money,those printed dollars by Fed?Few in India understand 'stocks'and 'MF'as compared to'gold','land'and'interest from fixed deposits in banks'.Politicions like Obama and economists like Fed manage this world.What is the way out for illiterate of politics and economics, the general public?Any way out of chaos comes the order,the evolution,the growth of education and knowledge.Let us be patient and vigilent and keep trying for the way out.

Like 

Shashi

Sep 14, 2011

it's time the corporates with huge cash reserves and those with big profits , should pool in their collective resources, Financial and Managerial to devise new avenues for generating employments in large scale. Give earning power to general public empowering them with spending power which will again would further increase the business, of this very corporates,direct or indirect.
Stop depending on the Govt's. spending's based on taking on debt in their nations budget.

Like 

sushil kumar

Sep 4, 2011

What Mr. Bernanke is doing about it ?

Like 

Hasit Hemani

Sep 3, 2011

US Fed is definitely economic "Terrorist organization"rescuing Economic offenders, plunderers,rascals at the cost of their own tax payers and countries like India whose currency is linked with US Dollar.How we can continue linking Rupee with US Dollar in this circumstances ? Are our own bankers Donkeys ? Like Nassir Hussain would have said "There are few good Bankers otherwise rest are Donkeys in India.

Like 

Sanjay

Aug 18, 2011

Very detailed and true analysis for real US situation. Thanks for insightful article.

Like 

Jose

Aug 18, 2011

Ajit, very well said..It is so scary to be in the markets with these financial terrorism, The US prints more money and the inflation happens in emerging markets. They have been defying basics of economics. we need to see for how long. the arrogance is showing up and will pull the world with the US is the fear.

Like 
  
Equitymaster requests your view! Post a comment on "Is the US Fed a terrorist organisation?". Click here!