Your browser does not support CSS. If images appear below, please disregard them.
DollarDaze
Where is the dollar heading? Why are the prices of everything going up while my wages are stagnating? Do deficits matter? Is the price of gold indicative of a market mania? Why is there so much fuss over the Fed?
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
- John Maynard Keynes
Home | News Headlines | Article Index | Bullion Dealers | Economic Data | Market Data Feeds | Advertisers | About | Support Us | XHTML
  • If laid end to end in US$1 dollar bills this amount of money would reach what planet from the Sun?

    Click here for the answer
Global Money Supply
  • Global Money Supply Data
Daily Metal Prices
Bullion Dealers
Recommended Books
  • We entrusted the experts with our financial security and now we're reeling from the economic crisis. How do we get back on our feet...and invest wisely?

    In The Wealth Code: How the Rich Stay Rich in Good Times and Bad, financial planner and investment strategist Jason Vanclef delivers straight answers...and solutions.

    Visit the book website at www.thewealthcode.com.

  • Empire of Debt
    Bonner and Wiggin enumerate a long list of chronic ailments that imperil the American financial system--a massive trade deficit, soaring personal and government debt, a housing bubble, runaway military expenditures.
  • The Intelligent Investor
    The classic bestseller by Benjamin Graham, perhaps the greatest investment advisor of the 20th century, The Intelligent Investor has taught and inspired hundreds of thousands of people worldwide.
  • Methods of a Wall Street Master
    This book covers all the important aspects of making money and integrates them into a unifying philosophy that includes economics, Federal Reserve policy, trading methods, risk, psychology, and more.
  • What Has Government Done to Our Money
    If you ever wondered about why prices keep going up, if you ever wondered why cars don't cost $2,000 anymore, if you asked questions like this and never thought you were getting a full answer, this is the book you need to read.
  • Economics for Real People
    Economics for Real People is a clearly-written overview of "Austrian" economics, a libertarian school of economic thought founded by thinkers from Central Europe in the early 20th century.
  • Economics in One Lesson
    "Economics in One Lesson", Henry Hazlet's, book makes a powerful and persuasive argument in favor of a free market economy.
  • The Road to Serfdom
    This classic by one of the 20th century's leading libertarian thinkers has established itself beside the works of Orwell and others as a timeless meditation on the relationship between human freedom and government authority.
  • Crash Proof: How to Profit From the Coming Economic Collapse
    For those accustomed to America's economic dominance, Crash Proof is a frighteningly forthright wake-up call.
 
Printer Version E-Mail Article Discuss

What the Citi Conversion Might Really Mean

Delta Global Advisors

We learned on February 27th of the Treasury's plan to convert up to $25 billion of their $45 billion preferred Citigroup shares to common equity. According to the company, the existing shareholders would be diluted by 74%. Thus, the taxpayers will cease collecting dividends on their holdings and they'll slide down the capital structure in Citigroup to the lowest rung on the ladder. Ostensibly, it looks like a good deal for the bank and not such a great deal for the government/taxpayer.

So why would the government allow such a deal to occur? The answer is to gain more control over Citigroup (with other major banks next in line) in order to garner complete control over the money supply. The Treasury's preferred holdings in Citigroup carry no voting rights, whereas the common shares will. After conversion, the government would own 36% of the common stock. The government does not need to be the largest shareholder in the company to dictate policy, but it does greatly facilitate the process. The power grab will increase the Administration's and Fed's ability to direct bank lending, which can lead to an abrogation of the system of checks and balances that control our money supply.

Under "normal" conditions in a fiat currency system, a Central Bank influences the cost of money through the manipulation of the overnight interbank lending rate. In the U.S., the Federal Reserve influences the Fed Funds rate and Discount rate through the everyday operations (buying and selling of Treasuries) of the Federal Open Market Committee (F.O.M.C.). Those rates in turn influence interest rates across the yield curve and therefore, indirectly controlling the cost of money. Additionally, the Federal Reserve directly controls the amount of money in the Monetary Base (high powered money) through the expansion and contraction of its balance sheet. Base money is then used by banks through the Fractional Reserve System to multiply "high powered" money tenfold or greater.

Therefore we know that the amount and cost of money is highly influenced by the government. But the system has built in one key element which allows for a condition of checks and balances to exist. The consumer must still want to borrow and banks must still desire to lend. Unless that situation exists, the larger monetary aggregates will be very slow to increase. And if base money is not loaned into existence, it remains limited in its ability to drive up prices. In today's economy, banks' balance sheets are in disrepair and the consumer has taken on a record amount of debt. Thus, despite the best efforts of the Fed and Administration to force-feed more borrowing, market forces have determined not to increase the amount of debt regardless of its availability or rate.

However, none other than Ben Bernanke himself said at his February 25th House Financial Services Committee hearing that the Treasury may own a "substantial minority" of banks' common shares. Their goal is not to nationalize banks but to garner significant control. If they can control the lending practices of financial institutions, they dominate all three factors in the process that determine the supply of money -- the quantity of base money, the level of interest rates and the amount of lending provided by banks.

The U.S. government would then be able to expand the money supply buy purchasing Treasury's burgeoning debt relatively unfettered. The American consumer, businesses and banks may be cut out of the equation. All that will matter is government's desire to spend our way out of a depression and their ability to finance it with alacrity. As of today there are $673 billion in excess reserves sitting on the Fed's balance sheet, which government can then use to purchase Treasuries and keep yields low by forcing banks to finance their spending plans.

One of the most important freedoms which made America great was the protection of the purchasing power of our money. The wisdom of our founding fathers was such that they understood the cornerstone for a successful economy was to ensure the stability of our nation's currency. While that protection began to be eroded with the signing of the Federal Reserve Act of 1913, we may now be abdicating complete control of our money supply to the government. If so, we'll be able to thank our government for not only creating a depression, but making sure it is accompanied by intractable inflation. Share/Save/Bookmark

_____

© 2009 Michael Pento

ABOUT THE AUTHOR

Michael Pento Michael Pento is a well established specialist in the Austrian School of economic theory with more than 16 years of industry experience. He is a contributor to various forums across the Web and a regular guest on CNBC and other national media outlets. Check out his podcast, The Mid-Week Reality Check.
Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

This article has been favorited 0 times on DollarDaze.org | Make this your favorite article

Posted in Guest Commentary, Banking Crisis, Predictions, Michael Pento

2022215
 
Search DollarDaze
  • Add to Technorati Favorites
Your Purchasing Power
  • Click to see full-sized charts
Web Media
  • Aaron Russo Interviews Congressman Ron Paul
  • Excellent video explaining the US Federal Reserve
  • Money As Debt
  • I.O.U.S.A.
  • Chris Martenson - The Crash Course
  • Money - A Brief History of the American Dollar
Sponsored Ads
London Metal Exchange
  • Click to see full-sized charts
Sponsored Ads
Donations Accepted


  • Help support the development of DollarDaze.org by donating today.

    Click here to learn about other ways you can help us.