The Fleecing of America, or Where Did All of Our Money Go?
by Mike Lince
I believed the reports from the Bureau of Labor Statistics that the U.S. inflation rate has held at around 1-2% for the past five years. However, I noticed from our trip abroad to Sicily in 2012 that one U.S. dollar was worth about .80 Euros, and on our most recent trip through Europe in 2014 one dollar was worth about .72 Euros. That is a 10% loss of the purchase power of my dollars in two years. Something is not right.
Shortly after our return to the U.S., I had a conversation with a friend of mine who was trained as a financial advisor at Morgan-Stanley. I told him I noticed a discrepancy between what my dollars were worth and what our government was telling me about the inflation rate. I mentioned also that my wife and I both were experiencing severe sticker shock¹ at the price of basic food items. We were so used to buying directly from growers for fruits and vegetables in Mexico and more recently in Croatia and Spain that we could not believe how much food costs have increased in the last three years.
So I asked my friend, ‘What is going on with food prices? I thought inflation was down around 1 or 2%.’ He smiled as though he was about to reveal some secret of adult life to a naïve child.
He said to me, ‘Mike, inflation is actually closer to 10%.’
‘What? But that cannot be!’ I replied. ‘The government publishes monthly figures that show the inflation rate is…only…’ I paused. He was smiling again. I knew I had said something foolish, but I did not know what it was.
‘Don’t feel bad,’ he told me. ‘Lots of people make the same mistake. That is because the government is gaming the numbers. The bureau that publishes inflation numbers now selects only those consumer goods that hold steady in price to calculate inflation – like electronics.’ I mentioned how inaccurate those numbers could be. I mean, the television I spent $1,000 on in 2008 now sells for half that. Then he stated, ‘It may not be ethical, but it is legal. That is how the government works.’
Then I zeroed in on the real question. ‘So where did all the money go that causes the inflation that we do not see or we are not told about?’ This is what he explained to me as best as I can recollect.
Remember the bank bailout of 2007 when the government rescued the big banks that they decided were too big to fail? They were JP Morgan-Chase, HSBC, Citibank, Bank of America, Goldman-Sachs, Morgan Stanley and two dozen more. What weighted the banks down were the subprime home loans that financed mortgages that were beyond what people could afford. (The banks were actually holding ‘derivatives’ of those mortgages, which became virtually worthless.) When the markets crashed and the housing bubble burst, over one million people lost their homes in 2008 alone. Millions more found themselves underwater, owing more on their homes than their market value. The government agreed to buy up the paper on the worst of those mortgages through Fannie Mae and Freddie Mac. Many of those home loans will never be repaid. In fact, many of those houses will never be lived in again.
To cover those losses, the Fed sells Treasury Bills to whoever will buy them, currently to the tune of about $1 billion/month to keep Fannie and Freddie afloat. When countries like UK, China, Saudi Arabia and Germany have purchased all they want of those T-Bills, the Fed sells the difference to the big banks, the same banks that are considered too big to fail.
Here is the catch. The Fed keeps control of the T-Bill market through their buyback program. However, the Fed is not legally allowed to buy T-Bills from itself. In order to buy back T-Bills, the Fed has an arrangement to buy them from the same banks they sold them to. In exchange for this service, the banks charge a fee. Thus, the banks make a huge monthly profit on an investment in T-Bills that never have to reach maturity to pay off.
This is a rudimentary story in which I have described banking activities in simplified terms. What it boils down to is that the government is printing money to the tune of about $1 billion/month to cover bad debts that are likely to never pay off. In exchange for financing this debt, the Federal Reserve Bank pays service fees to the big banks who buy up surplus T-Bills with the intent of selling them directly back to the government. And I thought Bernie Madoff was a big-time schemer.
I am now better able to understand why the big money interests in the U.S. are willing to spend millions to keep our senators and representatives re-elected. Is it ethical? No, but it is legal.
¹Sticker shock: The experience of disappointment or surprise when you learn how expensive something is
Applecore Too 
Reblogged this on Applecore and commented:
Part 2 in a series of stories about getting reacquainted with living in the United States after three years abroad.
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Most interesting post Mike. Thanks.
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Thank you, Tom.
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I knew the inflation rate depended on the “market basket” that was included, but I didn’t know about the financial slight-of-hand on the Tbills. I haven’t seen any inflation numbers close to 10%, but again, I guess our personal, real inflation rate depends on what we buy. Too bad we can’t eat electronics. There are lots of scary things that we should worry about, but for me, the biggest is what is the US going to do when the Chinese et al. decide that they don’t want to buy treasuries? ~James
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James, after reading your comments, I checked what percentage of American debt is owned by the Chinese. Out of $17.4 trillion (April, 2014 figures), China is the largest foreign government holder of T-Bills at $1.27 trillion – about 7% of the total. I think China has a vested interest in the health of the U.S. bond market. Any faltering in the yield of T-Bills would affect the value of the Chinese yuan which would undercut their export-based economy.
The Social Security Trust fund is the largest single holder of T-Bills (about $3 trillion) followed by the Federal Reserve Bank ($2 trillion). The rest is tied up by individual investors, state and local governments, pension funds, mutual funds, and of course, banks. I think our biggest worry is that the Congress not allow the federal government to default on our debt via another shutdown, something Senate Minority Leader Mitch McConnell has threatened to do if he becomes Majority Leader. Whether Wall Street would let him follow through with that threat is another question.
As always, thank your for sharing your thoughts. – Mike
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Don’t get me started on Mitch McConnell. I grew up in KY, and that clown is, to use KY parlance, a horse’s ass. ~James
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I am not sure how to get it all worked out, the budget for our country has been established and it is hard to cut back on our number of ‘bombs’ and other aids to war zones. We simply cannot back out on some of these ‘deals,’ but I am also concerned about the lower rate on our dollar overseas. Used to be in the 70’s and 80’s we would get a much higher exchange with our dollars! So sad, but unsure how to ‘fix’ our dilemma, Mike!
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Robin, the U.S. still spends about $250 billion/year more than it takes in via taxes. While tax cuts may be politically popular, but they are economically disastrous. Programs that stimulate the economy also stimulate revenues. One of the main reasons for our declining annual deficit is the gradually improving economy.
With less government waste and spending, we could get back to an annual budget surplus like we had in the 90’s. Unfortunately, the politicians are in charge of the budget. I can only hope we get back to a more stable footing. Clinton’s campaign committee got it right – ‘It’s the economy, stupid.’
Cheers, Robin, and thank you for sharing your comments. – Mike
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Just like Thomas Jefferson said: “Banking institutions are more dangerous than standing armies.”
I believe what most people probably believe, that our banks and government are terribly flawed and at least somewhat corrupt. Still, I think they are likely the best that have ever existed on a large scale.
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Before my wife and I traveled and lived abroad, I was of the impression that our banking and government systems were corrupt beyond repair. While I am dismayed at the degree to which the wealthiest among us in the U.S. have usurped the system to serve their greed, I admit that government corruption in other countries is systemic, particularly in developing and economically emerging countries. In Bosnia-Herzegovina, for example, it was understood that you had to pay a fee (bribe) to the government in order to get a job. That is why so many young people have left in the 20+ years since they gained their independence. Thus, I agree with your comments.
Thank you for adding to the dialogue. That was my intent in writing this story – to get the feedback and reactions from as many people as were motivated to participate in the discussion.
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