Credit Asset Packages, Monetized Debt & the Ruins of the Middle Class

Credit Asset Packages, Monetized Debt & the Ruins of the Middle Class

Ben Bernanke, the cryptographer upholding the FED during the 2008 financial crisis, ensured that our economy’s deflation of significant magnitude would be king. He led us to nominal interest rates at zero, a punishment to savers and an impossible number since lenders will not receive that when it is possible to hold cash. Ben was wrong. Do not be like Ben Bernanke. Negative interest rates have never occurred in 5000 years. They are only a topic of any conversation since 2000. Negative inflation rates prove how wrong Keynesian economics are. Switzerland now has negative interest rates on a 30 year bond. Global Keynesianism is a disease.

What would happen to the First World if we, for instance, in the United States took the negative interest approach to borrowing and saving? Suppose the CB moved interest rates into negative territory. This is hypothetical. The bank could use this strategy in the next economic downturn. In the event of a recession, interest rates would almost have to be cut. Think about how you borrow money. Suppose you borrow $100 and keep it for a year. If you borrowed that with interest (1%), compounded annually for ease, you would pay an additional dollar for the pleasure of borrowing that money. In a negative rate scenario, you would be paying back $99 if interest was -1%. You would be making money off of borrowing money. This is what we could say is an unintended consequences. There are benefits to this, for the individual. If the economy is weak, there is no room to wiggle. This negative rate theory blows the Zero Lower Down. To continue to stimulate the economy this would work temporarily. But consider that things are never what they appear.

Negative Interest Rate Policy
Negative Interest Rate Policy

Consumers will never be paid to take on debt. That is absurd. Negative interest rates are intended for nations and corporations only. This is specific to the interbank lending system. So who benefits? ONLY BIG BANKS will benefit from negative interest rates. The crisis comes with the unwillingness to spend and the further inability to push money into an economy where folks are unwilling to spend it. Negative interest rates mean that future generations will certainly be benefitting nothing from moneys saved or invested today. The costs would be heavier than we can imagine and this type of policy would obliterate free markets around the world. Even Warren Buffet believes that negative interest rates distort everything. Sustaining negative interest rates would be like defying gravity. If interest rates are nothing, values can be infinite. But if interest rates are high, values will pull valuation of assets down.

Asset valuation then tends to incite emotion in consumers and investors. The CPI, Consumer Price Index, if largely affected by either waning sentiment or waxing enthusiasm. This moves money. So, interest rates most definitely effect the movement of money, or its velocity both naturally and as a by-product of this sentiment.

According to Mike Maloney, “Velocity of money is the thing that emotion determines. This is how many times a unit of currency changes hands in a specific time period. This determines the GDP.” In turn, the GDP tends to influence the setting of interest rates. The effects of the Fiat Money Machine Controllers linger for generations.

Let’s talk MBS and CDOs! These strongly impacted the flow of money in the not too distant past.

This is an excellent graphic to refer to, the CDS representing Credit Default Swaps of the Mortgage Backed Security and Collateralized Debt Obligation.

CDS representing Credit Default Swaps of the Mortgage Backed Security and Collateralized Debt Obligation

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An MBS is a Mortgage Backed Security. Recall 2008. The housing bubble was a result of a really spoiled pot of Mortgage Backed Securities. These mortgages are originated by small regional banks that repackage and sell the mortgages to larger institutions. The small banks are merely the middle man but don’t really carry the concern over a borrower’s ability to pay the debt. Investors such as the FED or private hedge funds buy up those securities (with absolutely the lowest interest rate around) and the bank uses the proceeds to pay off its loan originally used to lend money to the borrower at higher interest rate than it obtained. There, the bank makes a small sum. Multiply this many times over and by selling off those home loans to larger investors, the small bank remains solvent and able to borrow, mark up interest, repackage, sell the loan and continue to borrow ad infinitum. The investor stands to gain greatly if they don’t lose. You see, the investor in those mortgage backed securities becomes the recipient of the monthly mortgage payments, interest and principle. The investor continuously makes a profit off the borrower even though that loan no longer resides at its point of origin. There remain three classes of mortgages, often called Tranches in their purchased package asset term; Prime (AAA rated, the folks who make their payments on time), Sub Prime (BBB rated missing a payment here and there, but overall current, some foreclosures) and not even worth rating (NINJA – No Income, No Job, No Assets). The Federal Reserve in 2008 became the largest shareholder of mortgage backed securities. Just revisiting that housing collapse should still leave you shuddering.

This same process happens with Auto Loans, of which now more than 7 Million Americans are 90 days or more overdue on a car payment, and Revolving Debt or credit cards.1 While the mad money printing machine has kept cranking, credit has been extended in all directions as far as the eye can see. The only way the economy keeps chugging along is credit. If the printing and fake credit ever stop, the game is over. Credit Cards are perhaps the worst, but a notable sign of an impending crisis or change wave. Credit Cards have recently gone into default to match the percentages and demographics of 2008-2009.

A CDO is the larger overseer of an MBS or a series of Mortgage Backed Securities. A Collateralized Debt Obligation is that ultimate grouping of revenue generating debts (mortgages sold off) into an asset class. CDOs were preceded by Junk Bonds. Securities firms subsequently launched CDOs for a number of other assets with predictable income streams, such as automobile loans, student loans, credit card receivables and even aircraft leases. However, CDOs were a niche product until 2003, when the housing boom cause institutions issuing CDOs to turn their attention to non-prime mortgage-backed securities as a new source of collateral.

Looking deeper into the art of Credit-Default Swaps on your own will also leave you aghast. But this time, the balance on the debt is exponentially larger. What lies ahead is obviously not positive for folks carrying a heavy load of debt, many of whom live paycheck to paycheck ten years later. Money printing has eliminated the average American’s ability to save anything. At a time when debts are at record highs, credit is extended farther than ever, and borrowing is less regulated than ever. People in general are becoming harshly impoverished. There is actually not even a great need to dig in statistically here. Just observe your community. See if you notice more homelessness, fewer folks eating out, longer food bank lines, greater numbers of plasma donors and even failure to maintain homes and cars by those who have seemingly nice material possessions.

Why is it harmful to monetize debt? In short, monetizing debt inserts many changes and layers and separates the borrower from reality. The borrower is always slave to a lender.

Alexander Hamilton; James Madison

James Madison called debt a curse on the public, while the first Treasury Secretary, Alexander Hamilton, called it a blessing provided that the debt wasn’t excessively large. The ability to quickly pay off a debt does not mean the debt is nonexistent. Monetization essentially seeks to shove debt payment down the road, but stands to make the debt larger. This absolutely pushes inflation. This is harmful to those who are underemployed especially. It can be fastidious and grow to hyperinflation to cover the cost of borrowing more, or monetizing debt. Bonds are issued by the Treasury and the FED can print the paper to buy those bonds. The separation of those two bodies is just an illusion. The Treasury has a constitutional obligation to repay. Debt is reallocated and just owned by the public. Unfortunate for all of us. In the past, and in other countries, this can be overcome by printing Trillion Dollar Bills. That itself is laughable. The modern day debt monetization term emanated from the Treasury’s cost of financing World War II’s debt through increased bond issues. The 1951 Treasury-Fed Accord settled the question of who controls the Fed’s balance sheet by reversing roles. The Fed would control monetary policy by supporting debt prices without control over any debt it holds, and would buy what the public doesn’t want, while the Treasury would focus on the amount of issuance and categorical maturities.2 If the US decided to print money every time it spends, the dollar would be abandoned. It is believed that point is near. The overall outcome of such thinking and actions is utterly devastating.

Financial fragility is what we have ten years after the 2008 recession; the middle class is all but decimated. Most middle class households in America have no savings, almost all have less than $1000 in savings or cash for an emergency. This is so contradictory to the health of a middle class lifestyle. Since Fed Funds Rates have been at zero for 7 years and remain well under a normal healthy 3% (which would put mortgages at around 5-8% interest on a 30 year), this only hurts savers, the middle class, the meat and potatoes of a healthy free market capitalist country. This is just not normal, not okay. Who is really being hurt when debt is monetized and then printed paper is used to purchase debt and pass on the cost of the printing to taxpayers? Inflation. This exemplifies the middle class, or rather, the ruins of the Middle Class.

Negative Interest Rate Policy
Negative Interest Rate Policy

Edward Wolff of NYU states that right now, the average family in America has enough financial reserves to go on for 2 days to 3 weeks but then it is over. That’s roughly everyone in America being one emergency or one paycheck away from a major crisis or insolvency. The Middle Class has experienced severe wage stagnation in tow with the devaluation of the dollar. Stagnating incomes led people to save at first, then housing prices rose, banks wanted to profit, interest rates rose. Then the housing market collapsed as well as most middle income earners’ net worth and savings became pointless. A great deal of this is due to personal responsibility and being uneducated about money. But equally, there is a significant influence of very bad economic policy. The pervasive greed of Central Bankers or a Central Power Structure is what befalls an empire over and over throughout history.

What is the truth about government debt and financial illiteracy? People pay a heavy price for being financially illiterate. But controllers do not want subservient workers and spenders and savers to be financially literate. We have to change that fact. The face of financial fragility is the face of those with no college degree and exorbitant student loan debt alike. Educated and uneducated. Plenty of medical doctors are financially illiterate and plenty of seemingly successful people are going broke in the belief that they are living the American Dream.

Ray Dalio wrote a comprehensive analysis of the financial collapse we are experiencing and how the patters of cause and effect in money repeat. His book, Principles: Life & Work, is a highly recommended 2017 publication.5 In that book he discusses cycles in every economy. The Bubble Phase is ever the interesting one which discusses money, leveraging and sustaining debt growth. Then the top, when central banks tighten monetary policy. Then comes the down trend, the depression where monetary policy does not work at zero interest. More QE, then carriage of debt and its ultimate monetization. He believes we are in the repeat of the 1930s. We have a debt crisis and interest rates hit zero. The CB drives up the value of financial assets such as debt securities (financial assets), and interest rates go to zero. Asset prices rise with populism as the gap between rich and poor widens. The wealth gap is a key indicator of the end of a cycle, with decadence and ultimate collapse. Think back to the history of the 1920s where decadence was supreme. The finances are being tightened as they were in the mid-1930s. There is a rise in strong minded nationalistic leadership as well, matching the political economic cycles between WWI and WWII. The cause and effect relationships are analogous; risk comes along with global tension as we reach the crossroads of debt expansion. There is less capacity to print, expand and continue. Asset prices are subject to taking a few hits. Recession is an inevitability, although not immediate, but sooner than later. The rivalry worldwide begins as financial. All wars are Bankers’ Wars. An established power versus an antagonistic emerging power. We are watching this live between US and China. Economic rivalry is astonishing regardless of how the economic conditions were obtained. While the results will not be exactly the same, monetary policy is becoming ineffective in our current era.

To avoid what happened in the late 1930s, we should make sure that capitalism works for the bottom 60% of the population (the wealth gap or opportunity gap). People need to be useful, employed, motivated to contribute. Debt, however, fails us by removing our motivation to work harder to get ahead. Too much availability of fiat money and imaginary capital destroys innovation. The issue of our current level of indebtedness is a National Emergency and a National Security Issue alike. People, especially young people, become disconnected and disengaged. This happens with false affluence. This is a risk to our future. Financial education is very key at this point in our history.


  1. BAD DEBT Sub Prime and Auto Loan Defaults:
  2. Forming Monetary Policy:
  4. ENRON – The Smartest Guys in the Room
  5. Ray Dalio