Lawmaker: U.S. sent giant pallets of cash into Iraq

[EJ]

Lawmaker: U.S. sent giant pallets of cash into Iraq
February 7, 2007 (Reuters)

The Federal Reserve sent record payouts of more than $4 billion in cash to Baghdad on giant pallets aboard military planes shortly before the United States gave control back to Iraqis, lawmakers said Tuesday.

The money, which had been held by the United States, came from Iraqi oil exports, surplus dollars from the U.N.-run oil-for-food program and frozen assets belonging to the ousted Saddam Hussein regime.

Bills weighing a total of 363 tons were loaded onto military aircraft in the largest cash shipments ever made by the Federal Reserve, said Rep. Henry Waxman, chairman of the House Committee on Oversight and Government Reform. (Watch Democrats put the former top U.S. official in Iraq on the spot Video)

"Who in their right mind would send 363 tons of cash into a war zone? But that's exactly what our government did," the California Democrat said during a hearing reviewing possible waste, fraud and abuse of funds in Iraq.

AntiSpin: Pop quiz: What's the difference between the Federal Reserve air lifting 363 tons of cash to the bankrupt economy of Iraq in 2003 and the Fed air lifting thousands of tons of cash to bankrupt U.S. cities some day off in the future, should a debt deflation run to its logical conclusion? Answer: Distance.

The picture is from a presentation by Evan F. Koenig, Vice President (pdf), Senior Economist, Federal Reserve Bank of Dallas, May 2003. I discuss the presentation at length in Ka-Poom is a Rhyme not a Repeat of History.

What's the likely outcome of the exponential credit inflation of the past 38 years? Some say deflation, others inflation. I say both, one after the other. Ludwig von Mises famously put it this way, "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

When I read "The Great Reckoning" in 1989, I was introduced to the deflationist argument. When I read, "The Hyperinflation Survival Guide: Strategies for American Businesses" by Dr. Gerald Swanso a couple of years later, I was introduced the hyperinflation perspective. When I read "Deflation," by Gary Shilling in 1998, I read another argument for deflation. I’ve read a dozen books since then, including Peter Warburton's excellent "Debt and Delusion" and have argued the point with dozens of people over the years.

Not satisfied with any of these treatments of the cross-current of deflating leveraged assets (debt deflation) and inflating goods prices and, possibly, wages (due to currency depreciation), I developed my own theory in 1999, which I call Ka-Poom Theory, which describes a period of disinflation followed inevitably by a period of high inflation (not hyperinflation) as the Fed attempts to deal with the deflation and spurs, by lowering interest rates in the face of skittish foreign and domestic investors and in the condition of an already weakening dollar, a repatriation of dollars to the U.S., and an expatriation of domestic capital.

Some folks don't like this idea. They think it's too convenient a way out for careless borrowers, as if borrowers are getting away with something. But the idea that Joe and Jane with the flat panel TVs in the MacMansion they can't afford gets a get-out-of-jail-free card from a big inflation is false. Everyone with savings held in assets denominated in the local currency gets hammered in an inflation, as in Russia 1992 – 1993. Yes, debt gets wiped out, but so do savings, such as they are. The survivors are those with their savings sufficiently well shoveled off to foreign held assets–property, bonds, currency–and gold. That group is comprised largely by what Dr. Hudson refers to as the “creditor class,” which will have hedged the inflation long before it happens by moving their money out of the U.S., as occurred in Mexico, Peru, Germany, Hungary, Russia, and every other nation where a major inflation has ever happened. The smart money gets out before the event. (Note that Dr. Hudson never talks about gold.)

For a better understanding of how the bond markets, which are supplying the credit, behave as a major Ka-Poom style inflation approaches, I refer to Dr. Farrokh Langdana, Ph.D., Professor, Finance/Economics, Director, Rutgers Executive MBA Program (USA). In Macroeconomic Policy Demystifying Monetary and Fiscal Policy. Here's a brief excerpt of a chapter I will go into more detail on later (copyrighted material re-printed with permission):

Readers are aware that the yield curve has been inverted for a while. It is perhaps telling us that foreign lenders are getting harder for Paulson & Co. to come by, and that monetization of debt needed to pay for the wars in Afghanistan and Iraq, which are now being paid for by Asia, may be around the corner. As Dr. Hudson explains in his December 2006 presentation, Real Estate: Growth, Crash, or Soft Landing?, a collapsing housing bubble will only make matters worse, as foreign investors are presumably being sold stability, transparency, and growth, especially in the sales pitch on asset backed securities. It's not hard to conceive of a self-reinforcing cycle of economic contraction and rising interest rates, leading to a decrease in demand for and decling in the value of the dollar, leading to increases in domestic inflation, rising interest rates, further economic contraction, and so on. In other words, Ka-Poom.

[Jim Nickerson]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

It's not hard to conceive of a self-reinforcing cycle of economic contraction and rising interest rates, leading to a decrease in demand for and decline in the value of the dollar, leading to increases in domestic inflation, rising interest rates, further economic contraction, and so on. In other words, Ka-Poom.

EJ, or anyone,

I'll be doggoned if I can translate your sentence into the other words of Ka-Poom. Where is the disinflation, is it in the "decrease in demand for and decline in the value of the dollar"? I thought in disinflation or in deflation, the dollar would become more valuable.

Someone help me.

[jk]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

EJ, or anyone,

I'll be doggoned if I can translate your sentence into the other words of Ka-Poom. Where is the disinflation, is it in the "decrease in demand for and decline in the value of the dollar"? I thought in disinflation or in deflation, the dollar would become more valuable.

Someone help me.

Readers are aware that the yield curve has been inverted for a while. It is perhaps telling us that foreign lenders are getting harder for Paulson & Co. to come by, and that monetization of debt needed to pay for the wars in Afghanistan and Iraq, which are now being paid by Asia, may be around the corner. As Dr. Hudson explains in his December 2006 presentation, Real Estate: Growth, Crash, or Soft Landing?, a collapsing housing bubble will only make matters worse, as foreign investors are presumably being sold stability, transparency, and growth, especially in the sales pitch on asset backed securities. It's not hard to conceive of a self-reinforcing cycle of economic contraction and rising interest rates, leading to a decrease in demand for and decling in the value of the dollar, leading to increases in domestic inflation, rising interest rates, further economic contraction, and so on. In other words, Ka-Poom.

jim, i share your confusion. the extract from langdana points to a period of rising deficits under bush i, resulting in the bond market seeing a risk of monetization and so selling off long bonds, raising long term interest rates. ej then discusses the currently inverted curve, with relatively low long term rates as if it is evidence of foreign reluctance to purchase long bonds. but low long rates mean relatively high bond prices, and high prices do not bespeak a lack of demand. someone is buying long bonds at current prices. if the housing bust indeed undermines the economy and short rates are dropped, i can foresee the dollar dropping and long rates rising - an inverse "conundrum" - which would echo the rate rise under bush i. so, to try to decode ej: economic contraction, say flowing from the housing bust, leads to a drop in short rates and a drop in the dollar, leading to a sell off in long bonds and a rise in long rates. the rise in long rates further squeezes the economy, leading to a further drop in short rates by the fed, leading to a further drop in the dollar, leading to more sales of bonds and higher long rates. thus, just as the inverted curve doesn't seem to be doing its usual prediction job, supposedly predicting weakness, we would have a steepening curve not doing its usual prediction job, predicting strength. the curves in this model postdict rather than predict. the current inverted curve postdicts the rising short rates of the past few years, likely with the yen carry trade as the intervening variable. if the economy slows and short rates drop we will shift to a steep curve that postdicts the feds rate lowering moves. so anyway, i think i've decoded ej's statement. i think.

[Jim Nickerson]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

Thanks, jk, but I still do not see the Ka, or did you just show me, and I didn't see it.

Try something like this, "Jim, here is the Ka ......................" That would probably work.

[jk]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

Thanks, jk, but I still do not see the Ka, or did you just show me, and I didn't see it.

Try something like this, "Jim, here is the Ka ......................" That would probably work.

jim, here is the ka: "the economy goes sour secondary to the housing bust." that's it. that's the ka. all the rest is poom.

remember the great deflation scare of '01? the economy had gone into recession and the fed was cutting, cutting, cutting while talking about the importance of avoiding deflation. over the course of that year the dollar index rose - a sign of deflation. gold rose about 5.5%. long rates bounced around a bit but were essentially flat for the year. this was ka.

the next year, '02, the fed cut just a little more. the dollar index dropped like a rock. gold rose over 20%. the long bond rose sharply and long rates fell. this was poom.

so one explanation of what ej is postulating is that you start out like in '01 but that long rates behave differently because of the changes in the composition of the population of bond owners. that is, the bond owners/buyers/sellers are now more sensitive to the movements of the dollar. so if the dollar is dropping, they are less interested in acquiring bonds, and instead of long rates coming down, they go up. this squeezes the economy more, leading to the vicious circle he describes.

i think i'm postulating more here than ej has said. at least i don't recall his describing ka-poom in these terms. but this is how i make sense of the theory.

[ratfink]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

Jim,

For another view...

Long rates rise, under the scenario of some limit to the expansion of credit, and bid up by a creditor class worried about the value of their holdings in the reserve currency. This breaks the back of the bubble, with cascading debt defaults and disinflation. In a wired world, this can happen much faster than ej's ka-poom chart illustrates, I think. At this point there is a reaction on the part of the gummints to inflate their way out of the crisis, by getting more currency into circulation by helicopter, etc. There's the poom.

There is no reason that these processes should be neat and clean, and every reason to believe that, even in a world of perfect information, they would be mishandled and spastic; governments, companies, banks, all reacting to different stimuli at the same time in different ways, creating a lot of confusion and noise. And their information is far from perfect, so I would expect a lot of volatility and contradiction, but over the long term (though perhaps only in retrospect) the trends would be obvious.

The stated intent of Bernanke is to prevent the ka at any price, so the window where the dollar becomes more valuable may be very brief, or only in certain sets of transactions for some groups of people.

How about that?

[akrowne]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

A few months ago I finally worked out that inflation and deflation are really just two dual surface embodiments of the same underlying phenomenon: excess debt buildup into malinvestment, and then collapse/repudiation as debt outruns society's ability to service it and productively invest.

Inflation vs. deflation is just a matter of policy. Either way, the rest of the world flees from the disintegrating economic system, causing its currency to plummet on the exchange and real assets to rise in absolute terms (as safe havens). This should indicate the appropriate general investment strategy.

Anyway, this pallettes-of-cash thing is hilarious. It's almost like they were doing a test run of the helicopter drop. They really don't care about appearances anymore, do they?

[Jim Nickerson]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

jim, here is the ka: "the economy goes sour secondary to the housing bust." that's it. that's the ka. all the rest is poom.

remember the great deflation scare of '01? the economy had gone into recession and the fed was cutting, cutting, cutting while talking about the importance of avoiding deflation. over the course of that year the dollar index rose - a sign of deflation. gold rose about 5.5%. long rates bounced around a bit but were essentially flat for the year. this was ka.

the next year, '02, the fed cut just a little more. the dollar index dropped like a rock. gold rose over 20%. the long bond rose sharply and long rates fell. this was poom.

so one explanation of what ej is postulating is that you start out like in '01 but that long rates behave differently because of the changes in the composition of the population of bond owners. that is, the bond owners/buyers/sellers are now more sensitive to the movements of the dollar. so if the dollar is dropping, they are less interested in acquiring bonds, and instead of long rates coming down, they go up. this squeezes the economy more, leading to the vicious circle he describes.

i think i'm postulating more here than ej has said. at least i don't recall his describing ka-poom in these terms. but this is how i make sense of the theory.

By Jove, jk, that is a good explanation which I grasp and for which I thank you for taking your time and thought to explain.

[Jim Nickerson]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

Jim,

For another view...

Long rates rise, under the scenario of some limit to the expansion of credit, and bid up by a creditor class worried about the value of their holdings in the reserve currency. This breaks the back of the bubble, with cascading debt defaults and disinflation. In a wired world, this can happen much faster than ej's ka-poom chart illustrates, I think. At this point there is a reaction on the part of the gummints to inflate their way out of the crisis, by getting more currency into circulation by helicopter, etc. There's the poom.

There is no reason that these processes should be neat and clean, and every reason to believe that, even in a world of perfect information, they would be mishandled and spastic; governments, companies, banks, all reacting to different stimuli at the same time in different ways, creating a lot of confusion and noise. And their information is far from perfect, so I would expect a lot of volatility and contradiction, but over the long term (though perhaps only in retrospect) the trends would be obvious.

The stated intent of Bernanke is to prevent the ka at any price, so the window where the dollar becomes more valuable may be very brief, or only in certain sets of transactions for some groups of people.

How about that?

Thanks, Ratfink, that helps too.

[jk]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

By Jove, jk, that is a good explanation which I grasp and for which I thank you for taking your time and thought to explain.

thanks for pushing the question, jim. i hadn't really thought it through until i tried to write it down.

[Charles Mackay]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

A few months ago I finally worked out that inflation and deflation are really just two dual surface embodiments of the same underlying phenomenon: excess debt buildup into malinvestment, and then collapse/repudiation as debt outruns society's ability to service it and productively invest.

Inflation vs. deflation is just a matter of policy. Either way, the rest of the world flees from the disintegrating economic system, causing its currency to plummet on the exchange and real assets to rise in absolute terms (as safe havens). This should indicate the appropriate general investment strategy.

Anyway, this pallettes-of-cash thing is hilarious. It's almost like they were doing a test run of the helicopter drop. They really don't care about appearances anymore, do they?

Aaron, I also believe that how the debt is destroyed is simply a policy decision by the "deciders" and that ain't Bush. It's made by the owners of the central banks. And it comes down to what is the best way for them to maintain their control and hegemony and how are they currently positioned. Since we are in that runnaway period where it requires accelerating debt increases in order to maintain GDP we know that it will be done soon. Productive enterprise simply can't generate the income required to service the debt load... so the question is how do we protect ourselves. Debt, which is now used as money, has gone parabolic and it has to be liquidated in order for the system to restart.

OK, now I'll put that tinfoil hat on ...the one that Bart gave me

[grapejelly]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

This type of story illustrates the fundamental difficulty most of us have swallowing the deflationist's story. How can currencies become *more* valuable in a credit collapse except perhaps in a transitory period? There are simply too many ways to inflate and too much incentive to do so.

Every loan represents someone's asset and someone's liability. Dr. Hudson has shown that financial liabilities increase exponentially and eventually swamp the underlying economy's ability to service resulting debts. What few of us can swallow is increasing value of fiat irredeemable currency.

Some deflationist believers go so far as recommend long term treasury bonds as good investments.

I don't know why it isn't obvious that what can be created at no cost will be created at no cost when the time comes. The time is now and money creation won't stop. There are too many ways to expand the money supply and many of these ways do not involve private borrowing at all.

Japan did not experience deflation. Yes, the property market and the stock market collapsed. But the money supply never dipped much and basically kept expanding. GDP expanded as well through this so-called deflationary period. What deflation?

Japan tapped its domestic savings for large public works projects, and also coddled the banks and protected them against costly writedowns and technical insolvency. Why wouldn't similar measures be adopted in all countries when and if credit eventually collapses?

All our existing money is financed with debt and there are many ways little more sophisticated than helicoptor drops that can prevent deflation. These
methods can be couched in investment terms and packaged to look more positive than helicoptor drops. For instance, the US government can match contributions to your IRA or 401(k), which would "increase investment" and of course help prop up the stock market. The US government can set up the Resolution Trust Corp Part 2 and buy up failing mortgages or even houses, thus bailing out the banks. Inflation will take care of RTC 2 so in a few years it will look financially brilliant as it won't necessarily lose (nominal) money. And it will be presented as a big positive to the economy, of course.

Inflation will meanwhile still say "low" in such a period. The "creditor" class may know better but they will be too busy benefiting to raise a stink.

This helicoptor story is a great one and shows us the implausibility of true deflation coming to the US or any fiat currency economy even when and if there is a credit collapse.

[Sapiens]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

Some deflationist believers go so far as recommend long term treasury bonds as good investments.

Think of it in terms of liquidity, if your mortgagee defaults he can't print cash, while the Gov. can.

-Sapiens

[Charles Mackay]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

This Michael Nystrom quote is appropriate to this inflation/deflation discussion

Michael Nystrom, Bull! Not Bull
Take a look at this quote, which can be found all over the internet: If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.

This quote is attributed to Thomas Jefferson, though it is most certainly apocryphal. However I use it because it is instructive in many ways. First, don't believe anything just because you read it, even if you've read it many times. You can find this quote on a hundred web pages attributed to Jefferson. Second, even though Jefferson didn't say it, there is still wisdom in whoever did: "First by inflation, and then by deflation..."

As I already pointed out, we've already had the inflation. Most everyone is in debt up to his eyeballs, and the dollar has been inflated to within 5% of its life. There's not much more room to go before it is completely dead. These are hard times for many individuals, corporations, and the government itself. Ben Bernanke even told the government so recently -- that this is the "calm before the financial storm."

But pretend for a moment that YOU are a Federal Reserve bank, and all these entities owe YOU the money. When you look at the problem from this point of view, something quite amazing happens. Why, there is no problem at all! Those poor consumers, businesses and the Federal government have all gone and gotten themselves into debt, haven't they? Well now they are just going to have to pay it all back. End of story. What is the problem now?

As the Bank, your power comes from 1) your monopoly on the issuance of legal tender, 2) your ability to create it out of thin air and 3) your willingness to loan it out and charge interest on it. In fact, deflation wouldn't be such a bad thing at all, since it increases the value the currency you have a monopoly on creating. During deflation it is best to have a mountain of cash and a positive cash flow to ride it out. The only problem is if folks start defaulting on you. But that has already been taken care of with the Bankruptcy Reform Act of 2005. That law was written by the credit card companies, i.e. the banks, i.e Federal Reserve members, to keep working people on a treadmill of perpetual debt. This reminds me of the stories of economic colonialism John Perkins told in his book, confessions of an Economic Hit Man. First the World Bank would go to some natural-resource-rich third world country and offer it a fat loan to "develop" its resources. The loan would be bigger than necessary, and certainly more than the country could ever afford to pay back - but the bank would say, "with your new refinery/mine/port/whatever, you'll have enough revenue to pay it back." When the country eventually did default, the IMF would sweep in with "fiscal austerity measures" for the people and the government. All the revenue from the new development would be siphoned to the banks in order to pay off the huge loan. Tsk tsk.

Sound familiar? Anyone who bought a house in the last five years knows that mortgage bankers rarely advocated financial prudence when buying a house, but instead pushed the idea to "buy as much house as you can (or can't) afford!" And now with prices coming down, many of those buyers are stuck right where those third world countries got stuck. Looks like a fiscal austerity plan is coming down the pike for many consumers so they can stay on the financial treadmill while the productive fruits their life - their labor - are siphoned off by the bank. Because the banks still know that as much money as they make trading and manipulating paper and financial "products," there is still only one true source of wealth, and that is human labor.

No, the Fed is not stupid. Not stupid at all. There will always be booms and busts, and the best way to position oneself is to take advantage of both sides of the trade. Or as one responder to my last article put it so eloquently:

I am fascinated by the common perception that the Federal Reserve is a proven non-stop inflation machine. Inherently, the Federal Reserve uses inflation and deflation to whipsaw the average bystander out of their savings. I don't see how one economic machination is more favored over the other when the goal is to ensure that the public's savings ends up in the accounts of the shareholders of the Federal Reserve System."


So, in fact, inflation/deflation is merely a policy decision by the banksters and one that we are all guessing on. Nystrom sounds like a Ka Poom advocate doesn't he?

[Jim Nickerson]

Re: Lawmaker: U.S. sent giant pallets of cash into Iraq

This Michael Nystrom quote is appropriate to this inflation/deflation discussion

Michael Nystrom, Bull! Not Bull


But pretend for a moment that YOU are a Federal Reserve bank, and all these entities owe YOU the money. When you look at the problem from this point of view, something quite amazing happens. Why, there is no problem at all! Those poor consumers, businesses and the Federal government have all gone and gotten themselves into debt, haven't they? Well now they are just going to have to pay it all back. End of story. What is the problem now?

As the Bank, your power comes from 1) your monopoly on the issuance of legal tender, 2) your ability to create it out of thin air and 3) your willingness to loan it out and charge interest on it. In fact, deflation wouldn't be such a bad thing at all, since it increases the value the currency you have a monopoly on creating. During deflation it is best to have a mountain of cash and a positive cash flow to ride it out. The only problem is if folks start defaulting on you. But that has already been taken care of with the Bankruptcy Reform Act of 2005. That law was written by the credit card companies, i.e. the banks, i.e Federal Reserve members, to keep working people on a treadmill of perpetual debt.

I consider myself rather cynical, and even though I may be, I have difficulty believing there actually exists a cabal of bankers who intentionally contrive to get everyone into debt and then to lock them into it by manipulation of the bankruptcy laws, and then intentionally bring about a deflation in order to reduce most of the populace into serfdom. However, if where we are as a nation now could be attributed to the conscious actions of bankers, then perhaps they have achieved already two out of three steps of the "plan."

But just as well, I really cannot imagine why anyone with multiple millions of dollars would keep endeavoring to double, triple, or quadruple such wealth. Maybe I just don't understand the true happiness obscene wealth can buy.

If you are more cynical than I, then perhaps the portions of Nystrom's remarks will come to fruition. I personally don't discount the possibility, but even if it happens, I think I will still doubt that the chain of events were guided by some group's conscious efforts.

I believe there is greater happiness when "less is more." So maybe 90% of the population is destined to find real happiness.