By Trace Mayer, on October 21st, 2009
A lawsuit over billions of dollars of unclaimed savings bonds is brewing over whether the Treasury Department or the States should be able to confiscate the minimal remaining value of these certificates of confiscation. This article will be written from the first person perspective of the victim who has been robbed after investing in these ‘risk-free’ assets issued by the United States Treasury.
DILIGENT SAVER
In 1965, being a diligent young man my parents rewarded me for graduating from High School by buying me a $75 United States Savings Bond. Following this pattern of savings while I was in the United States Army in 1969 I saved $6.25 per month so that I could buy a $25 dollar savings bond each quarter. Upon hearing the news of unclaimed bonds being confiscated by either the States or the Treasury Department therefore today, October 19, 2009, I cashed in these United States savings bonds. The original face value of these 3 bonds was $125 Dollars. I paid $93.75 for these in the 1960’s.
If I had used gold and silver to buy these same bonds then it would have cost me 2 ounces of gold and 24 ounces of silver. When I cashed these in today I received $825.11 which consisted of $93.75 in principal and $731.36 of interest. The value of gold today is a $1,063.90 per ounce and silver is $17.81 per ounce. Thus the $825.11 dollars represents 47 ounces of silver and no gold. But that is not all.
TAXES
From the $825.11 dollars there is $731.36 of interest. At approximately 30% tax rate that amounts to about $219.41 of tax liability. Therefore, the net amount received is $605.70 and will purchase a mere 34 onces of silver.
OPPORTUNITY COST
If I had kept the gold and silver that I could have bought these United States savings bonds with back in 1965 and 1969 then I would have two ounces of gold and about 24 ounces of silver. I could sell that bullion for about $2,850. What is wrong with this picture?
LYING GOVERNMENT
Newsmax reports, “The Treasury Department counters that it indeed tries to find owners of the unclaimed bonds, and says it has a Web site where people can simply type in their Social Security number to see if they have one.”
Diligent Saver responded, ‘Despite paying significant amounts of taxes for decades and using both a Social Security number and valid address while filing I never received a single communication from the Treasury Department about these outstanding savings bonds. Nevertheless, they were extremely diligent notifying me when they thought I owed more taxes.’
CONCLUSION
There are significant assets available that may be confiscated by the government as unclaimed property. The Treasury Department does have a tool to locate these certificates of confiscation. While many argue that these types of assets are ‘risk-free’ this example plainly illustrates that these assets are subject to payment, counter-party and political risks.
On the other hand, gold and silver are immune to all of those risks except political. For example, during some of the time period at issue the Ancient Metal of Kings was considered so dangerous by the United States government that it was illegal for residents in the Land of the Free to own.
But this is typical of fiat currency and the governments which issue it. Neither the paper tickets nor costumed officials should be trusted. In every case throughout history their paper coupons have over time proven to be merely certificates of confiscation. And to think the Chinese own $2T of these silly little coupons!
DISCLOSURES: Long physical gold, silver and platinum with no position in the problematic GLD or SLV ETFs.
By Trace Mayer, on September 21st, 2009
IS THE TREASURY OUT TO KILL MONEY MARKET FUNDS?
Tim Geithner, the Goldman Sachs Secretary of the Treasury, has gone on record as saying that the government will withdraw its $3 trillion backstop guarantee from the money market fund industry, on schedule, this September 18.
While I am for any reduction in the government’s role in the economy, this decision is pretty interesting. Why would they do it now, when even a cursory examination of the real economy shows that things are shaky and rocking the boat on investor confidence seems a bit of a gamble?
I will try to answer that question, but only after stepping back to 2008 when I was told by a friend of mine in the most rarified air of high finance that he and all his peers had pulled all their cash out of money market mutual funds in March of 2008. They had done so because of the large quantities of suspect paper littering the portfolios of the funds, much of it anchored to commercial real estate and syndicated portfolios of consumer loans.
As of mid-year 2008, 40% of outstanding corporate paper was held by money market mutual funds. The funds had taken on this paper as a way of trying to boost their yields and therefore gain a competitive advantage.
Another friend, an executive of a very large mutual fund company, confirmed that what lurked under the hood was ugly indeed.
In September of 2008, these concerns were made tangible when one of the largest U.S. money market funds, the Reserve MMF, “broke the buck.” Which is to say that the fund’s net asset value had fallen below the $1.00 benchmark that money market funds traditionally hold the line on. When the news broke, the public started heading to the exits, which is why the government had to step in with a deposit guarantee.
For the record, money market fund sponsors are under no real obligation to maintain a $1.00 NAV. Rather, that has become customary – a selling point, if you will – with the fund sponsors under no hard obligation to assure their NAVs don’t fall below that level. They hold the line at $1.00 because they know that it is very much in their interest – and the interest of their industry – to do so, even if that means they have to step up to the plate and provide the cash required to repair any holes in their balance sheets to avoid breaking the buck.
Interestingly, though breaking the buck is seen as something of a “black swan” event, it actually happens with great regularity. In fact, according to one study, over one-third of all money market funds have had their NAVs fall below $1.00 since July 2007. The only reason this news didn’t leak out to the public, causing the sort of run experienced by Reserve, was because the fund sponsors were able to quickly rush in with the necessary cash infusion.
Which brings us to September 18 and the expiration of the government’s guarantees.
While the money market funds have clearly reduced their exposure to the worst sort of paper, a fact you can see in the steep downward slope of their yields over the last couple of years – the higher the risk, the higher the yields – they are still sitting on huge chunks of risky paper.
Glance at the prospectus of your favorite money market fund, and you might find, as I just did by looking at that of one of the world’s largest money market funds, that 38% of the portfolio is made up of CDs issued by foreign banks, 9.9% in short-term corporate paper, and 12.3% in medium-term paper, much of it hitched to the fates of portfolios of car loans, insurance companies, and a variety of corporate entities.
In exchange for taking on that risk, you would have earned, so far in 2009, a yield of 0.55% on your money. Yes, just a hair over half of one percent. Of course, out of that handsome return, you’d have to pay your taxes, cutting the return well below even today’s purportedly reduced inflation levels.
As of September 2009, there was $3.58 trillion in money market mutual funds, of which just shy of $2 trillion is sitting in taxable non-government funds. But that money is starting to move: over the last month, money market mutual fund redemptions have been on the rise – with assets falling by a significant 15.3%. With the government pulling its guarantee, and given the risk associated with the money market funds, I have to wonder how many more investors might also decide to pick up stakes in the days and weeks just ahead?
And where might all that money head? Most likely, given the cautious nature of money market fund holders, into FDIC-insured accounts and CDs, and into Treasury funds and instruments. That, of course, helps the banks, and it helps the government meet its aggressive funding needs, while simultaneously taking pressure off interest rates.
All of which may explain why the Treasury is pulling the plug on its money market fund guarantees. And, perhaps, in the process pulling the plug on the non-government money market funds.
If you are aware of a money market fund sponsor that relies on its non-government money market funds for a sizable percentage of its income, it might make for an attractive shorting candidate.
Finally, I have a question for those of you who are parking money in taxable money market funds at this point, especially those that are not invested in Treasuries. And the question is this, “Are you out of your mind?”
Recognizing big, emerging trends in the economy and in the markets – and getting in ahead of the crowd – is how smart investors can profit even in times of crisis. And that’s what The Casey Report focuses on, whether it’s shorting a bond insurer standing squarely in the way of the economic avalanche or buying into grains before their prices shoot up. One of our current favorites is a play on rising interest rates, a trend that is already baked in the cake. Click here to learn more.
[Editor's Note: Due to unnecessary risk for inadequate reward on Wednesday 16 September 2009 I closed my PayPal money market fund which was yielding a whopping 0.05% APY. Mr. Galland of Casey Research elucidates the reasoning behind this decision very well. In addition to just holding the FRN$ balances over the last few months I have also been moving into gold, silver and platinum and I am sure most of you know how to buy silver, etc. but this is especially important with silver trending towards backwardation. As the liquidity in money market funds evaporates this could put further pressure and perhaps hasten the coming market crash. Make sure your capital is safe and liquid.]
By Trace Mayer, on April 23rd, 2009
Gregory Mankiw, professor of court economics at Harvard and economic advisor to President George W. Bush, proposed negative interest rates in a recent New York Times article. Mike Shedlock, a prominent financial commentator has appropriately weighed in 19 March with Time For Mankiw To Resign and again on 21 March with Economist Mankiw Defends Policy of Theft.
 Ivy-League Court Economist
Interestingly Mankiw, a monetarist, appears to have the support of Paul Krugman, a Keynesian, who responded, “Greg Mankiw says yes. Since that was the answer I arrived at for Japan more than a decade ago, I have to say that it makes sense in principle.”
MR. MANKIW’S PROPOSAL
“Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent. … The idea of negative interest rates may strike some people as absurd, the concoction of some impractical theorist. Perhaps it is. But remember this: Early mathematicians thought that the idea of negative numbers was absurd. Today, these numbers are commonplace. Even children can be taught that some problems (such as 2x + 6 = 0) have no solution unless you are ready to invoke negative numbers. Maybe some economic problems require the same trick.”
I will attack Mankiw’s insane proposal from several fronts, missed by most commentators, but nevertheless extremely important. While I do agree with revoking legal tender status for all FRN$, not just 10%, I differ with his proposed procedure and underlying moral reasoning.
LEGAL TENDER
Notice that Mankiw suggests that ‘the Fed were to announce that …. would no longer be legal tender.’ This talk about the Fed determining what is and is not legal tender baffles me. Perhaps Mr. Mankiw should open up a copy of the Constitution and read it.
Under Article 1 Section 8 Clause 5 Congress is given the power to ‘Coin Money, regulate the Value thereof’. Notice the Constitution does not say what money is only that it is something that is coined rather than printed. The Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The Constitution operates on the principle that if a power is not specifically delegated then it is prohibited.
In this case the Federal Government is given no authority to make anything legal tender. The Federal Reserve Act was enacted by Congress creating the Federal Reserve. Because Congress does not have the power to declare anything legal tender and because the Federal Reserve was created by Congress therefore it follows that the Federal Reserve cannot declare anything legal tender. The individual States do retain the power to declare things legal tender but are restricted under Article 1 Section 10 Clause 1 from making any ‘Thing but gold and silver Coin a Tender in Payment of Debts’. The creature cannot exceed the creator.
NEGATIVE REAL RETURNS WILL FAIL
On 18 March 2009 I established the case for why the Federal Reserve’s quantitative easing will fail. On 1 February 2008 I marked the first snowfalls of the Kondratieff Winter, or Great Credit Contraction, because of investor’s willingness to accept negative real returns.
Mankiw’s proposal will not work yet because although the US Treasury Bubble will burst and there are reasons how and why that will happen it has not happened yet. Most FRN$ exist not as physical tickets but as digital illusions. Mankiw has gotten a little bit ahead of himself as capital will eventually move from digital illusions into physical FRN$ illusions because physical FRN$ tickets are safer and more liquid.
This has not happened yet although the US government has been placing restrictions to prevent it such as the filing of Special Activity Reports, etc. Nevertheless, the attempt by Mankiw and Krugman is to force capital up the liquidity pyramid while the natural economic law is bringing it down. They may as well attempt to order the sun not to rise.
MORALITY
Since individuals are “endowed by their Creator with certain unalienable rights” and because individuals form governments to protect property, life, and liberty, it follows that individuals are superior to their creation of government. Individuals can grant to their creation at most only those rights they possess. No individual possesses the right to unjustifiably infringe on another individual’s autonomy, and because individuals create governments, no government can possibly be justified in the possession of such a right. Therefore, legitimate government must act within the constraints of the Non-Aggression Axiom. Otherwise those actors are merely criminal gangs costumed in government regalia.
Government represents one of the most powerful forces on earth. Therefore, an individual’s political beliefs reveal with perfect clarity his or her moral character.
In this case, Mr. Mankiw would use the brutal violence of government to arbitrarily steal 10% of anyone’s savings and finds this repulsive behavior to be the philosopher’s stone as ’some economic problems require the same trick’. Can there be worse psycho-sociopathic tendencies?
I wonder if Mr. Mankiw would recommend torture, invasion and genocide as good economic policies to get out of a looming recession because they would increase aggregate demand, stimulate the economy and increase GDP. Even Vladimir Putin revealed his understanding of these basic laws when he stated, “The only problem: your results were poor and this will always be the case because the work you do is unfair and immoral. In the long run immoral policies always lose.”
Mr. Mankiw and Mr. Krugman are not engaged in the study or teaching of economics but political dogma. And so we see evidence of the true motive of these two influential court economists which is most likely: the sadistic desire to abuse the power of the State to engage in looting and killing.
CONCLUSION
 The trick to get out of the current economic problems is really founded in morality. Decades ago Ludwig von Mises wrote in The Theory of Money and Credit, “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”
The solution to the current economic problems is to be found by picking up an extremely short document, the United States Constitution, and strictly applying its powers and disabilities in accordance with the Non-Aggression Axiom. Of course, doing so would drastically limit the ability of those who desire looting and killing.
If you look at every single problem we are facing today almost all are the result of a lack of respect for the rule of law and the Constitution. The solution can only be applied if society changes its idea about what the role of government ought to be. If society thinks that the role of government is to take care of individuals from cradle to grave and police the world by spending hundreds of billions of dollars on a foreign policy that cannot be managed then the greater depression will only exacerbate. Thus the true budget deficit and balance sheet deficiencies appear to be moral and not economic.
National currencies are like the common stock of nations. So long as the United States and its people continue violating these basic laws of morality and engaging in immoral policies the FRN$ will continue to decline. The price of the monetary metals, gold and silver, will increase. But if you think the United States is a rogue elephant on the world stage now just wait until she is truly panicked.
Disclosures: Long physical gold and silver with no position in GLD, SLV, US Treasuries such as TLT, UDN or UUP.
By David Barr, on April 20th, 2009
One of the puzzling aspects of the current economy is the soaring demand for US treasury bonds. On the face of it, T-Bills seem like a pretty terrible investment. The yields are low and given the massive government and current account deficits being run by the United States, it is highly likely that the dollar will lose value relative to other currencies.
But these loans aren’t investments, they are insurance. With the global economy in free fall nobody knows how bad things could get. There is a non-zero probability that we could be witnessing a true economic collapse. The sort of era defining event that will signal the end of the 500 year march of human progress and plunge us into a new dark ages. How will we know when it’s time to bust out the old amour suit. A good guess will be when treasuries fail. In other words if the US government defaults, we are all finished. The only assets that will be worth anything will be shotguns and canned beans.
Lets say things don’t get that bad, there is still a long way to fall. If the economy continues contracting at its current rate, by the end of 2010 things will be as bad as the 1930’s. An economic collapse of that magnitude will have profound political consequences. Which brings us back to the original topic of the post.
In a climate of extreme uncertainty, the long history of stability is a unique asset of the American economy. The Euro is the most obvious rival currency to the dollar, but with less than a decade of experience the Euro has never survived a severe crises. If this recession hits the depths of the 1930s, politicians in hard hit countries like Spain and Ireland will be under intense pressure to break free of the Euro. During the great depression, countries that abandoned the gold standard benefited immensely from their devalued currencies.
Developing countries don’t offer better security prospects. It is hard to think of a developing country whose economic and political stability wouldn’t be threatened by a severe depression. The communist party is the third largest party in India’s parliament and the nationalist BJP is the second largest. It is easy to imagine a severe downturn tipping the balance of power towards these parties at the expense of international investors.
Latin America has a long history of socialist governments taking power and appropriating private property. It is not hard to imagine these elements gaining strength in countries such as Brazil, Mexico and Argentina. Africa and the Middle East are considered risky places to invest for too many reasons to list here. It is uncertain if the Chinese government can maintain stability through a severe downturn.
That leaves the US and the other wealthy English speaking countries as the most likely economies to survive a severe downturn. The catastrophe in Iceland demonstrates the danger of lending too much to a small economy. Given the quantity of money looking for a harbor it is possible to imagine international capital overwhelming a country such as Canada or Australia. Simply put it is possible to imagine the US economy surviving a complete meltdown in Canada, but there is no way Canada survives a collapse in America.
So what does this all mean for the future. As long as complete systemic collapse remains a real possibility, investors will be rushing to loan money to the US government. But as investors gain confidence that recovery is in sight demand for American debt will dry up. One sign that a recovery is on the horizon will be a decline in the dollar relative to other currencies. As the economy rises from the grave the dollar will steadily weaken.
This should be encouraged. One of the driving forces behind global instability has been the huge amounts of foreign capital entering the US economy and the countervailing large trade deficit that Americans have run. If we emerge from this crises with a more balanced global economy that would be a good thing.
By J.D. Seagraves, on December 31st, 2008
A recent headline at CNN.com said “Fed bails out GMAC with $6 billion.” Since I had heard it was the Treasury department funding the GMAC giveaway, I had to check the story to make sure this wasn’t another $6 billion being thrown down the drain. Fortunately, CNN just got it wrong: it was the feds , not “the Fed,” engaged in this particular instance of kleptocracy.
CNN’s error, of course, is not surprising. After all, an easy majority of financial journalists in the mainstream media clearly do not know the difference between the discount rate and the fed funds rate, nor do they have any clue what the Federal Reserve is or what it does. But thinking about the Fed made me realize that CNN’s error was actually no error at all. It will be the Fed that ultimately bails out GMAC.
The Treasury, after all, doesn’t have $6 billion, and it’s not going to tax us to get it — that’s way too old school. Where will Hank Paulson get the money, then? By issuing new debt. And who will buy this debt? A substantial portion of it will be bought by the Fed, which can “monetize” any debt or asset (i.e., print money to pay for it and say the new money is “backed by the debt (or asset)” for which it was printed).
More importantly, it is the power of the printing press that leads everyone else (China, Saudi Arabia, etc.) to buy American debt. If these foreign bondholders thought that their interest and principal would have to be financed by taxation, they’d know there’d be a second American Revolution before they recouped their investments. Instead, they know their money is “safe” so long as the Fed can create it at will to make good on the government’s bonds.
But there’s a reason “safe” appears in scare quotes. The Fed is creating an unprecedented amount of money, and as Austrian economic theorist Peter Schiff pointed out in a recent Wall Street Journal editorial, “each additional dollar printed diminishes the value those already in circulation.” Foreign bondholders are currently putting up $1 million to receive $21,360 in annual interest. If the dollar’s decline in purchasing power merely maintains current ten-year trends, then the real value of the principal at the end of the ten-year maturity will be just $767,330. And is anyone deluded enough to think price inflation won’t be much higher over the next ten years than it has been over the past decade?
Apparently so — for now. But as soon as these creditors wise up to the fact that the U.S. is broke, be prepared for a massive devaluation of the dollar: it’s going to zero.
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