Risk assets are now supported by the new ”Keynesian Put”, the expectation that fiscal measures will be deployed to combat any renewed weakness in the economy/markets (independently of any larger political projects). But asset prices remain primarily supported by excess monetary abundance across the world:
- There have been 667 interest rate cuts by global central banks since Lehman;
- G7 central bank governors Yellen, Kuroda, Draghi, Carney & Poloz have been in their current posts for a collective 17 years, yet only one (Yellen in Dec’15) has actually hiked interest rates during this time;
- Central banks own $25tn of financial assets (a sum larger than GDP of US + Japan, and up $12tn since Lehman);
- There are currently $12.3tn of negative yielding global bonds (28% of total);
- There is currently $8tn of negative yielding sovereign debt (54% of total).
Who Owns The Federal Reserve?
The Federal Reserve (or Fed) has assumed sweeping new powers in the last year. In an unprecedented move in March 2008, the New York Fed advanced the funds for JPMorgan Chase Bank to buy investment bank Bear Stearns for pennies on the dollar. The deal was particularly controversial because Jamie Dimon, CEO of JPMorgan, sits on the board of the New York Fed and participated in the secret weekend negotiations.1 In September 2008, the Federal Reserve did something even more unprecedented, when it bought the world’s largest insurance company. The Fed announced on September 16 that it was giving an $85 billion loan to American International Group (AIG) for a nearly 80% stake in the mega-insurer. The Associated Press called it a “government takeover,” but this was no ordinary nationalization. Unlike the U.S. Treasury, which took over Fannie Mae and Freddie Mac the week before, the Fed is not a government-owned agency. Also unprecedented was the way the deal was funded. The Associated Press reported:
“The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.”2
This is extraordinary. Why is the Treasury issuing U.S. government bonds (or debt) to fund the Fed, which is itself supposedly “the lender of last resort” created to fund the banks and the federal government? Yahoo Finance reported on September 17:
“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”
Normally, the Fed swaps green pieces of paper called Federal Reserve Notes for pink pieces of paper called U.S. bonds (the federal government’s I.O.U.s), in order to provide Congress with the dollars it cannot raise through taxes. Now, it seems, the government is issuing bonds, not for its own use, but for the use of the Fed! Perhaps the plan is to swap them with the banks’ dodgy derivatives collateral directly, without actually putting them up for sale to outside buyers. According to Wikipedia (which translates Fedspeak into somewhat clearer terms than the Fed’s own website):
“The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York’s primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. . . . The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable.”
“To switch debt that is less liquid for U.S. government securities that are easily tradable” means that the government gets the banks’ toxic derivative debt, and the banks get the government’s triple-A securities. Unlike the risky derivative debt, federal securities are considered “risk-free” for purposes of determining capital requirements, allowing the banks to improve their capital position so they can make new loans. (See E. Brown, “Bailout Bedlam,” webofdebt.com/articles, October 2, 2008.)
In its latest power play, on October 3, 2008, the Fed acquired the ability to pay interest to its member banks on the reserves the banks maintain at the Fed. Reuters reported on October 3:
“The U.S. Federal Reserve gained a key tactical tool from the $700 billion financial rescue package signed into law on Friday that will help it channel funds into parched credit markets. Tucked into the 451-page bill is a provision that lets the Fed pay interest on the reserves banks are required to hold at the central bank.”3
If the Fed’s money comes ultimately from the taxpayers, that means we the taxpayers are paying interest to the banks on the banks’ own reserves – reserves maintained for their own private profit. These increasingly controversial encroachments on the public purse warrant a closer look at the central banking scheme itself. Who owns the Federal Reserve, who actually controls it, where does it get its money, and whose interests is it serving?
Not Private and Not for Profit?
The Fed’s website insists that it is not a private corporation, is not operated for profit, and is not funded by Congress. But is that true? The Federal Reserve was set up in 1913 as a “lender of last resort” to backstop bank runs, following a particularly bad bank panic in 1907. The Fed’s mandate was then and continues to be to keep the private banking system intact; and that means keeping intact the system’s most valuable asset, a monopoly on creating the national money supply. Except for coins, every dollar in circulation is now created privately as a debt to the Federal Reserve or the banking system it heads.4 The Fed’s website attempts to gloss over its role as chief defender and protector of this private banking club, but let’s take a closer look. The website states:
* “The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations – possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.”
* “[The Federal Reserve] is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.”
* “The Federal Reserve’s income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. . . . After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.”5
So let’s review:
1. The Fed is privately owned.
Its shareholders are private banks. In fact, 100% of its shareholders are private banks. None of its stock is owned by the government.
2. The fact that the Fed does not get “appropriations” from Congress basically means that it gets its money from Congress without congressional approval, by engaging in “open market operations.”
Here is how it works: When the government is short of funds, the Treasury issues bonds and delivers them to bond dealers, which auction them off. When the Fed wants to “expand the money supply” (create money), it steps in and buys bonds from these dealers with newly-issued dollars acquired by the Fed for the cost of writing them into an account on a computer screen. These maneuvers are called “open market operations” because the Fed buys the bonds on the “open market” from the bond dealers. The bonds then become the “reserves” that the banking establishment uses to back its loans. In another bit of sleight of hand known as “fractional reserve” lending, the same reserves are lent many times over, further expanding the money supply, generating interest for the banks with each loan. It was this money-creating process that prompted Wright Patman, Chairman of the House Banking and Currency Committee in the 1960s, to call the Federal Reserve “a total money-making machine.” He wrote:
“When the Federal Reserve writes a check for a government bond it does exactly what any bank does, it creates money, it created money purely and simply by writing a check.”
3. The Fed generates profits for its shareholders.
The interest on bonds acquired with its newly-issued Federal Reserve Notes pays the Fed’s operating expenses plus a guaranteed 6% return to its banker shareholders. A mere 6% a year may not be considered a profit in the world of Wall Street high finance, but most businesses that manage to cover all their expenses and give their shareholders a guaranteed 6% return are considered “for profit” corporations.
In addition to this guaranteed 6%, the banks will now be getting interest from the taxpayers on their “reserves.” The basic reserve requirement set by the Federal Reserve is 10%. The website of the Federal Reserve Bank of New York explains that as money is redeposited and relent throughout the banking system, this 10% held in “reserve” can be fanned into ten times that sum in loans; that is, $10,000 in reserves becomes $100,000 in loans. Federal Reserve Statistical Release H.8 puts the total “loans and leases in bank credit” as of September 24, 2008 at $7,049 billion. Ten percent of that is $700 billion. That means we the taxpayers will be paying interest to the banks on at least $700 billion annually – this so that the banks can retain the reserves to accumulate interest on ten times that sum in loans.
The banks earn these returns from the taxpayers for the privilege of having the banks’ interests protected by an all-powerful independent private central bank, even when those interests may be opposed to the taxpayers’ — for example, when the banks use their special status as private money creators to fund speculative derivative schemes that threaten to collapse the U.S. economy. Among other special benefits, banks and other financial institutions (but not other corporations) can borrow at the low Fed funds rate of about 2%. They can then turn around and put this money into 30-year Treasury bonds at 4.5%, earning an immediate 2.5% from the taxpayers, just by virtue of their position as favored banks. A long list of banks (but not other corporations) is also now protected from the short selling that can crash the price of other stocks.
Time to Change the Statute?
According to the Fed’s website, the control Congress has over the Federal Reserve is limited to this:
“[T]he Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute.”
As we know from watching the business news, “oversight” basically means that Congress gets to see the results when it’s over. The Fed periodically reports to Congress, but the Fed doesn’t ask; it tells. The only real leverage Congress has over the Fed is that it “can alter its responsibilities by statute.” It is time for Congress to exercise that leverage and make the Federal Reserve a truly federal agency, acting by and for the people through their elected representatives. If the Fed can demand AIG’s stock in return for an $85 billion loan to the mega-insurer, we can demand the Fed’s stock in return for the trillion-or-so dollars we’ll be advancing to bail out the private banking system from its follies.
If the Fed were actually a federal agency, the government could issue U.S. legal tender directly, avoiding an unnecessary interest-bearing debt to private middlemen who create the money out of thin air themselves. Among other benefits to the taxpayers. a truly “federal” Federal Reserve could lend the full faith and credit of the United States to state and local governments interest-free, cutting the cost of infrastructure in half, restoring the thriving local economies of earlier decades.
Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com and http://PublicBankingInstitute.org.
Manipulation Of Gold By Central Banks Cannot Continue In 2014
Gold has long been one of the many assets used by central banks. They certainly were one of the largest market participants, if not the largest single buyer and seller of Gold. Now, Deutsche Bank is exiting the fixing desk, China has an insatiable demand for Gold, and there is talk of an investigation of price manipulation. For years there's been rumors that large ibanks such as JPMorgan have used naked futures contracts to keep the price low. One theory supposed that if a certain quantity of futures contracts were not rolled over, the exchange would default on the contract. As we will see based on the below evidence, whatever the outcome, manipulation of the Gold market will be difficult or impossible for central banks in 2014.
With Deutsche Bank quitting the price-setting panel for gold and Bafin bearing down on the manipulators, Eric Sprott provides some more color on where the manipulation in the precious metals markets is underway (and when it will end)...
Submitted by Eric Sprott of Sprott Global Resource Investments ,
As we very well know, 2013 was a difficult but also puzzling year for precious metals investors. The price of gold, silver and their related equities declined by a significant amount while demand for physical bullion from emerging markets and their Central Banks was exceptionally strong.
A common argument that has been made to explain the precipitous decline of the price of precious metals in 2013 is of investors’ disenchantment with precious metals, which had been piling up in exchange traded products as a way for investors to gain exposure to the metals. Proponents of this theory point to the large declines in the total holdings of those ETFs as evidence of investors fleeing the precious metal trade. As shown in Figure 1, the price of both gold and silver suffered very significant declines throughout 2013. Therefore, if this explanation is correct, one would expect the total ETF holdings of both metals to be lower as well.
However, this is not the case. As shown in Figure 2 gold ETFs suffered large redemptions whereas silver ETFs saw their holdings remain more or less constant throughout the year, and this without any observable change in trading patterns in the two largest ETFs; GLD and SLV (Figure 3 shows the ratio of the trading values in the ETFs over time). If redemptions are a symptom of investors’ disenchantment with precious metals as an investment, shouldn’t silver have suffered the same fate as gold? Indeed it should have, but we think the reason silver ETFs were not raided like gold was that Central Banks do not have a silver supply problem, they have a gold problem. As we have argued before, the raiding of gold ETFs is bullish for gold because it reflects an imbalance in the physical market.1
Figure 1: Gold and Silver prices declined significantly in 2013
Figure 2: ETF Holdings - Troy oz (millions)
Source: Bloomberg, tickers ETSITOTL & ETFGTOTL
In this article, we further argue that the April raid on gold and gold ETFs almost backfired by creating a tsunami of buying in India and increased demand to unsustainable levels. In May 2013 alone, Indians imported 162 tonnes2 of gold in a market where monthly global mine production is about 182 tonnes. A continuation of this trend, coupled with strong buying from other Emerging Markets and their Central Banks, would have been overwhelming. But, the response was swift. We suspect that, at the behest of Western Central Banks, the Reserve Bank of India reacted by enacting, in incremental steps, restrictive measures to prevent gold imports (See Figure 4 for a timeline of the major changes made by the Indian Government).3
Figure 3: Traded Value - Ratio of SLV to GLD
Source: Bloomberg. Traded Value is calculated by taking the total trading volume for a quarter and multiplying it by the average price over that quarter. A ratio of 1 indicates that SLV traded as much, in $ terms, as GLD.
Figure 4: Efforts to Curb Indian Gold Imports
Source: Bloomberg, Economic Times 
Supply and Demand Imbalances: The Indian Effect
We have already discussed at length the supply and demand imbalance in an Open Letter to the World Gold Council, asking them to revise their methodology because it grossly understates the amount of demand coming from emerging markets.4 Our gold supply and demand table (Table 1) reflects the latest available data (2013 Q3 in most cases). World mine production, excluding Chinese and Russian production still stands at about 2,100 tonnes a year. Chinese net imports most likely exceeded 1,700 tonnes for 2013 (81% of world mine production) and demand from the rest of the world is rather stable.5
The overall picture has not changed much since our last article, with the exception of Indian imports. As of the second quarter of 2013, India had cumulative net gold imports of 551 tonnes, which annualizes to 1,102 tonnes.6 However, Q3 data shows net imports of only 31 tonnes (for a total of 582 tonnes YTD), which annualizes to 776 tonnes.
This incredible loss of momentum for “official” gold imports was the result of concerted actions by the Reserve Bank of India and the Indian Government. While the “official” justification for those restrictions is the large Indian current account deficit, this argument makes little sense. According to government officials, Indian’s taste for gold and the corresponding imports worsens the country’s trade balance, worsens its current account deficit and puts downward pressure on their currency, the Rupee.
But, without going into too many details, the classification of gold as a “good” in the trade balance is at best misleading. Since gold is more of an investment vehicle and is not “consumable” per se, it should instead be accounted for in the capital account of the balance of payments instead of the current account. Indeed, Switzerland, which is a large net importer of gold, reports its trade balance “without precious metals, precious stones and gems as well as art and antiques” to reflect fact that those are “investments” rather than consumption goods.9 In this case, why should India be any different and report their trade data excluding gold? To us, all the fuss about gold imports by the Indian Government is a red herring.
So, without the intervention in the Indian gold market, the shortage of gold would have wreaked havoc in the market, a situation that Western Central Banks could not tolerate.
Table 1: World Gold Supply and Demand 2013, in Tonnes
Sources: GFMS data comes from the WGC’s “Gold Demand Trends” publications for 2013 Q1, Q2 & Q3. Chinese mine supply comes from the China Gold Association and is up to October 2013, the annualized number is a Sprott estimate.8 Russian mine supply comes from the Union of Gold Producers and is up to 2013 Q3. Chinese data is taken from the Hong Kong Census and Statistics Department and covers the period Jan.-Nov. 2013 and is annualized to account for the missing month. Changes in Central Bank gold reserves are taken from the IMF’s International Financial Statistics, as published on the World Gold Council’s website for 2013 Q1, Q2 & Q3 and include all international organizations as well as all central banks. Net imports for Thailand, Turkey and India come from the UN Comtrade database and include gold coins, scrap, powder, jewellery and other items made of gold. The data is for 2013 Q1, Q2 & Q3. ETFs data comes from GFMS as well.
Conclusion and Outlook for 2014
As demonstrated in our Open Letter to the World Gold Council, there was a large supply-demand imbalance in 2013. The evidence presented here suggests that the decline in the price of gold in mid-2013 and the subsequent raid of gold ETFs (but not silver ETFs) was engineered by Western Central Banks to help solve their physical gold supply problem. However, the resulting increase in Indian gold demand exacerbated the problem. The solution was to restrict Indians from importing gold by all means possible in order to help the Western Central Banks regain control of the gold market.
However, the rate of drain in gold ETFs cannot continue forever; at the current pace of 930 tonnes/year, there are less than two years of gold left in ETFs. Moreover, Indians have proved highly creative at finding ways around import restrictions.10 Smuggling is on the rise and will most likely increase as smugglers become more sophisticated. Overall, we believe that interest in physical gold from emerging markets will remain a driving force.
Besides, mine production is unlikely to grow, as reflected by the significant decrease in capital expenditures expected for the major gold producers (Figure 5).
Accordingly, we believe that the manipulation of gold prices by central banks, as demonstrated by the above analysis, cannot continue in 2014. Therefore, we expect substantial increases in the price of precious metals as the true shortages become obvious.
Figure 5: Capital Expenditures ($mm) - XAU Index Members
Source: Bloomberg. Consensus analyst estimates are used for years 2013-2015.
P.S. Due to recent developments, we would also like to highlight some related media stories
Jan. 17, 2014: Germany’s top financial regulator said possible manipulation of currency rates and prices for precious metals is worse than the Libor-rigging scandal 
Jan. 17, 2014: Deutsche quits gold price-setting as regulators investigate fix (Did the regulators ask them to?) 
Dec. 13, 2013: Bafin Said to Interview Deutsche Bank Staff in Gold Probe 
Nov. 26, 2013: U.K., German Regulators Scrutinize Gold, Silver Pricing