Tuesday, 5 October 2010

KRIS SAYCE: Overt and Covert Counterfeiting – A Lesson in Central Banking

_Kris_Sayce_headshot Guest post by Kris Sayce

More dark and dastardly goings-on by the world’s central bankers.

And I’m not just referring to the corrupt money-printing taking place at the Reserve Bank of Australia’s (RBA) money printing agency Securency.

You may have read the odd story or two about what Securency has been up to. Accusations have been made that it has bribed foreign officials in order to win contracts for its polymer bank note business – such as the plastic Australian notes you use each day.

Even RBA officials have been drawn into the fire with accusations that current RBA chief, Glenn Stevens, “helped lobby Indonesia’s central bank for a bank note printing contract”.

Mr. Stevens was deputy governor of the RBA at the time.

In today’s The Age, the paper runs with the headline, “RBA counterfeiting claim”. The paper says:
“The Reserve Bank of Australia’s currency firm, Securency, produced millions of partly made foreign banknotes without authorisation from overseas central banks, in a practice described by former staff as effective counterfeiting.”
We’ll make a point here. It’s not “effective counterfeiting”, it is counterfeiting.

Isn’t it a shame that the mainstream press still can’t make the connection between unauthorised printing of paper money and authorised printing of paper money.

Because if they put their ant-sized brains to the task they’d soon figure out that not only is unauthorised printing of paper money a counterfeit job, but even the authorised printing of money is fraudulent.

Furthermore, they’d figure out that a central bank doesn’t even need to print actual bank notes in order to counterfeit money. It can just add it to the bottom line with a click of a mouse.

And even better for the central bankers is that they can get the retail banks to do the dirty work for them, thanks to fractional reserve banking. That’s where banks entice people to deposit money and then then it lends out to other customers using the savers’ money as collateral.

It’s counterfeiting because even though the savers’ cash has supposedly been loaned out for to a borrower, the saver still has the ability to withdraw their deposit without any need for the borrower to repay the loan.

How’s that possible unless new money is created from thin air?

But given how Securency seems to operate its business, we’re surprised The Age didn’t print what it really thinks rather than skirting around the edges. To us it seems clear. Why else would a money printer print counterfeit foreign currency unless it planned to use that currency in it’s [ahem] business dealings…

In other words, backhanded payments, bribes or the new term that everyone likes to use, graft. It all means the same thing, political corruption.

I mean, after all, why bribe someone by exchanging Aussie dollars for the foreign currency when you can just print as much of the foreign currency as you like? It’s pretty easy when you control the printing presses…

But of course, counterfeiting currencies isn’t unique to Australia. The US Federal Reserve is all over it at the moment. Today’s Australian Financial Review reports that:
“One of the US Federal Reserve’s most influential officials has publicly thrown his weight behind another round of asset purchases, warning the current economic situation facing the US is ‘wholly unacceptable.’”
What is it that New York Fed president William Dudley – the successor to Treasury Secretary Timothy Geithner – finds so “wholly unacceptable”? He explains:
“I conclude further [monetary] action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.”
It won’t surprise you to learn that the better outcome for inflation is higher inflation.

In the world of central banking, inflation is good. You know that, we’ve told you a hundred times before that’s how the central bankers, retail bankers and the mainstream view inflation.

But Dudley isn’t the only one to complain about low inflation. Boston Fed president Eric Rosengren told The Forecasters Club of New York last week that:
“While it’s clear to everyone why a high unemployment rate is a problem, one of the reasons we worry about a too-low rate of inflation is that the closer to zero the inflation rate gets, the greater the risk it could fall into a harmful deflation.”
We won’t cover old ground by pointing out the fallacy about the fears of deflation. We’ve written about this several times over the past couple of years.

But the fact is, deflation is only bad if you’re hocked up to the eyeballs, or if you’re the one doing the lending.

And seeing as the Fed – and every other central bank – is supposed to be the lender of last resort, the last thing the Fed wants is for it to actually have to be the lender of last resort. Doing so would expose to the world that it doesn’t have the capital to meet that obligation.

Not without printing more money that is.

Hence why the Fed is so keen to induce inflation. That way the retail banks can counterfeit their way out of the debt bubble rather than facing the prospect of overtly going bankrupt.

The reverse side of this of course is that while it saves the bankers, it destroys everyone else – people are encouraged to keep spending 50% and 60% of their salaries to pay off a debt when they would have been better off defaulting.

And at the same time they don’t realise their wealth and wages are being eroded over time as inflation takes its dastardly toll. That means you have to work harder and longer in order to receive the same wage.

Yes friend, we’re sure a valid case can be made that it wasn’t the women’s lib movement that helped draw more women into the workforce, but rather it was the inflationary policies of central bankers that forced women to enter the workforce because families were finding it increasingly hard to live on just one income.

Who’d have thunk it? Men in pinstriped suits doing more for feminism than the Suffragettes! What d’ya think of that, sister?

Anyhoo, it’s worth noting a chart Mr. Rosengren used in his speech. It was this one:
Federal Funds Effective Rate: Actual and According to the Taylor Rule
The red line shows where the US Fed Funds rate would be if it wasn’t for what’s known as the zero bound.

The zero bound simply means that a central bank can’t have an official negative interest rate policy. Doing so would mean the bank would charge customers to deposit money.

Think about it this way. It would be the equivalent of Commonwealth Bank charging you, for instance, 5% per year for you to deposit your savings in an account with them.

Now, that’s not to say that it doesn’t cost you money to deposit money with a bank. Once you add on monthly fees we’re sure plenty of people do pay to store their money in a bank – we won’t get on to the subject of whether paying for storage is a good thing or not, that’s for another day.

But can you imagine seeing an ad from the CBA telling you it will only cost you 5% a year to deposit your cash? It would hardly have savers busting the doors down to give them their money.

That’s why the central bankers have to go about it in an underhanded and deceitful way.

What it ultimately means is that a negative interest rate is a tax on savers. It penalises savers for having money.
But it’s not a tax in that you’re only taxed on the income produced from the savings. A negative interest rate involves deducting from the principal. It means a saver depositing $100, but only getting $95 back a year later.

What this chart does is give away the game. It reveals to one and all what the Fed’s real policy position is.
The Fed knows it can’t overtly tax savers by giving them back less than they paid in. So that’s why the Fed – and other central banks – choose to go about it fraudulently, by not telling people what they’re really doing.
Because of this, as Mr. Rosengren notes:
“Constrained by the zero bound, the Federal Reserve utilized less conventional policies…”
He then showed another chart, showing the extent of the unconventional policies:
Federal Reserve System Assets: Selected Temporary Operations
This chart shows how the Fed had to pump liquidity into the economy by buying up a whole bunch of worthless assets.

You can see how the chart jumps from somewhere around USD$50 billion in early October 2008 to over USD$1 trillion just a month or so later.

The reality is that it didn’t really matter what the Fed was buying. That was just the beard, the cover, the disguise. All the Fed really wanted to do was push more new money into the economy to make sure most banks didn’t fail and so that its inability to fulfil its promise of being the lender of last resort wasn’t exposed.

The upshot is that by pumping the extra liquidity into the market, the Fed has achieved its negative interest rate goal. If negative interest rates involve charging savers on deposited money, then devaluing savers’ money by increasing the money supply does exactly the same thing.

Mr. Rosengren from the Boston Fed confirms this with his chart. He confirms that it’s central bank policy to devalue the currency in order to save the bankers.

And they’re doing it in cruel, dishonest and underhanded way.

Which, when you look at how the RBA and Securency have behaved, appears to be pretty much par for the course when it comes to the world’s central bankers.

Kris Sayce
For Money Morning Australia


  1. I feel sick dude, its hard to get a grip on this thing,

  2. "Yes friend, we’re sure a valid case can be made that it wasn’t the women’s lib movement that helped draw more women into the workforce, but rather it was the inflationary policies of central bankers that forced women to enter the workforce because families were finding it increasingly hard to live on just one income."

    Oh please. And people call you guys nutters.

    Judge Holden


1. Commenters are welcome and invited.
2. All comments are moderated. Off-topic grandstanding, spam, and gibberish will be ignored. Tu quoque will be moderated.
3. Read the post before you comment. Challenge facts, but don't simply ignore them.
4. Use a name. If it's important enough to say, it's important enough to put a name to.
5. Above all: Act with honour. Say what you mean, and mean what you say.