06/04/2011 TARELV – Equity based property derivatives vs. fractional interests in mortgage notes as a new form of currency? – Part 1

Is the debt form of a claim on a financial asset better or is an equity form of claims on financial assets better to serve as a new form of currency for a sovereign community?

Before I get to answer that question, I would like to first clarify again that the word “derivative” has been grossly misunderstood and has been mis-used in the media, especially in recent times after the global financial crises had happened.

Generically speaking, the word means what it means. Anything that is derived from something else is a “derivative”. Therefore “money” is in fact the world’s first “financial derivative”. It helped people save the troubles associated with a bartering system to swap goods for goods, to swap services for services or to swap goods for services and vice versa.

Hence the economic utility of a “financial derivative” could easily be understood. It is simply an alternative form of a claim on an asset that may serve better as a medium to swap between claims on different goods or services.

There are different derivatives such as simple derivatives vs. complex derivatives just as there are different types of people, i.e. thin people vs. fat people or care-free persons vs. deep thinkers, etc. There are good derivatives vs. bad derivatives just like there are good cholesterol vs. bad cholesterol in our human bodies. There are also derivatives based on equity ownerships vs. derivatives based on loose credit claims just as there are glass-and-steel building built on rock solid foundations vs. tall buildings that were hastily erected on quick sand that may be doomed to collapse.

So to carry on the conversation we would first have to let in those who could distinguish between the intellectual academic meaning of financial derivatives to join the conversation and let out those derivatives-bashers in public media who do not care about a knowledge based intellectual pursuits.

The point I wanted to make is not another defense of derivatives but is rather that yes indeed, a currency should in fact be considered a form of a claim and hence a form of “financial derivatives” on certain assets a sovereign community owns. However, that unfortunately has not been the case in our modern world. The paper currencies, regarded as legal tenders and issued by may countries are in fact, very vague on what they are backed by.

The second question is that whether a claim of the equity ownership of financial assets that a country owns is better and safer than a claim on a debt obligation either collateralized on some financial assets or simply on the country’s verbal promise of its ability to pay better and safer.

These will be the subjects that I would like to continue to work on in future blog posts here in the coming months, hopefully with the active participation from many of the SwapRent.com blog readers. I have also set up a new group on Linkedin under the title “TARELV. Please feel free to sign up and leave your comments there as well.

Advertisement

05/09/2011 More on the "Bernanke Arbitrage" trade – fellow rich Americans helping fellow Americans own homes as a brilliant investment opportunity for themselves

In Southern California, all around us there are many wealthy people who own multi-million dollar homes along the coastal area from Malibu, Pacific Palisades, Beverly Hills, Manhattan Beach, Newport Beach, Laguna Beach down to La Jolla in San Diego. Many of them do not even have a mortgage.

On average many decent homes in these exclusive coastal area are worth above two million dollars. Wouldn’t it be a good idea for some of them to have a cash out refinance to put their idle home equity to work. Say they could simply borrow only one million dollars (50%) from their two-million-dollar home and use that money to invest in a partial interest through a member interest in a FARJHO/LLC deal to help some other less fortunate fellow Californians to own homes? One million dollar cash could probably help finance three or four FARJHO deals in the Inland Empire area for example, where average decent homes could sell around $300,000.

This is by no means just a charity work for these rich property owners. They could potentially do very well and become much richer by doing good this way. At today’s posting, the level of a 15-year fixed rate mortgage is about 3.83%. In a FARJHO deal the current market rental rate comes up to be between 5% to 7% annually. The positive carry could range between 1% to 3% after cost.

Generically speaking, that means if a rich home owner with a $2 million home borrows a fixed rate mortgage of $1 million (50% LTV) and invests the cash as a JPI (joint property investor) to help 3 to 4 other AHOs (Aspiring Home Owners) to buy homes through the FARJHO structure, he/she could earn a minimum spread of between 1 to 3% on the one million dollars every year for the next 15 years while turning his $2 million home equity in his current property into a total equivalent of $3 million home equity for the next 15 years.

When home prices start to go up anytime within the next 15 years (say 5 or 7 years later), he/she could simply unwind the trade by selling the homes he/she invested in when agreed by the AHOs, selling only the FARJHO member interests to the AHOs or to any other third party investors in order to take profit. He/she can then use the proceeds (much higher than $1 million) to pay off the original $1 million loan (either amortized or a balloon). He/she could have the choice of using either an interest only loan or a fully amortized loan for this 15 year fixed rate mortgage, with some benefits trade-off of course.

There are also justifiable tax oriented incentives such as the home mortgage interest deduction for unlocking this primary residence home equity through a moderate leveraging for these rich people. As long as they stick to the 30- or 15-year fixed rate mortgages so that there would not be unnecessary interest rate risk in the future, it could be made a prudent investment for them. Here below are a few other advantages as compared to his/her other investment alternatives with the cash generated through refinancing.

1. The annual dividend yield from the rental income in a FARJHO deal could also go higher periodically (say at every 3 year intervals) within the next 15 or 30 years while the interest rate cost has already been fixed for the next 15 or 30 years. That may make the total returns outcome even better than projected.

2. The key to success of this trade is the current positive carry (rent income could be obtained higher than the mortgage interest cost currently). Very few other relatively safe financial assets could generate such a high yield in dollar terms at the moment.

3. Using the money to invest in speculative gold, silver or other commodities would generate no yield at all and their high prices could suddenly crash and have a free fall. In contrast, it is unlikely there would be a further “crash” in the US residential real estate market going forward. It may at most drift a bit lower before it would eventually rebound, given a no inflation scenario within the next few years. As long as there is a positive carry, the chance that the trade would lose money would be minimal. With high inflation, this Bernanke Arbitrage trade could really win big.

4. Comparing with using that money to invest in stocks. Few stocks would have such high secured dividends for such a long period with such a high appreciation potential at the same time. Stock investments could also potentially end up being zero due to fraud or mismanagement such as Enron, WorldCom, etc. It is unlikely that investors would lose their shirts entirely on real estate.

5. With a current average 6% annual minimum dividend yield from rental income and the unlimited upside growth potential in home equity through investing in a FARJHO transaction, why would any free market investors put their money into a residential mortgage which only generates 3.86% annually at the moment with no upside appreciation potential at all for the next 15 years? The answer really lies in the name. This trading strategy is hence called a “Bernanke Arbitrage” trade.

Don’t stay a victim of Fed’s QEs. Big banks on Wall Street should not be the only ones who have benefited and continue to benefit from these unwise economic policies for our country. If we can not stop them. Why not join the loot? Let’s make Quantitative Easings work for the American working class people and home owners on Main Street!

05/06/2011 The Bernanke Arbitrage – Increasing home equity exposure through FARJHO (SM) near the bottom of the residential market

An easy financial arbitrage could be established by current home owners who have paid off their original mortgages on their own properties, assuming they have some income sources to secure a new mortgage on their current properties. Alternatively, any homeowners who have existing excess home equity to do cash out refinance could also take advantage of these timely arbitrage investment opportunities.

With the current long term fixed rate mortgage level around 5%, the home owners could use that money to invest in another home as a partial owner, i.e. a JPI (Joint Property Investor) to help another AHO (Aspiring Home Owner) to own home. From the JPI’s perspective, he/she could earn around 6% almost guaranteed minimum annual income through the rental payments made by the AHO in a FARJHO (SM) deal. As a result, the JPI could sit on a small annual positive cash flows (6% – 5% = 1%) while increasing the long term capital appreciation potential from his/her stake in the FARJHO (SM) LLC member interests.

Wouldn’t this be a great “Bernanke Arbitrage” as an inflation hedge for average Joe home owners on Main Street while Bernanke and his crony Wall Street cohorts keep enjoying the money for nothing through the Fed’s near zero interest rate policy and repeated QE’s?

With the dollar depreciation and high inflation almost a certainty as the Federal Reserve continues their loose monetary policy, increased home equity exposure would very likely outperform most other financial assets in an inflationary scenario. Borrowing money from GSEs, guaranteed by FHA at 5% or even lower for the long term may not be as good a steal as many Wall Streets cronies get but it is indeed better than nothing.

Isn’t it time that the Main Street jump on the bandwagon to get even with Wall Street? If the elite minorities on Wall Street could get money for nothing and make themselves more and more obscene profits, why can’t average Joe try to do the same on Main Street, rather than sitting there waiting for bread crumbs falling off from the Wall Street riches?

Don’t get mad, get even. Main Street needs not jettison Capitalism and embrace Socialism to solve their problems. They need to stand up and learn more on how to make Capitalism working for them. The revenge of the nerds is coming!

05/02/2011 The New TARELV backed foreign exchange rate system and SwapRent (SM)

As could be anticipated, SwapRent makes a precise new financial instrument with a robust mathematical model to make the TARELV based new exchange rate system a reality.

With reference to my two earlier blog posts, one on 04/12/2011 A new exchange rate pegging system based on and backed by each country’s total aggregate real estate and land value (TARELV) and the other on 02/20/2011 It is not Keynesian. It is not Monetarist. Perhaps we could call it SwapRentism? Any better suggestions?, the linkage between an external exchange rate for a country and the internal domestic free market based operation for swapping cash for an economic ownership of real estate could be established.

While the domestic money could sit in the bank deposit accounts to earn interests for any defined maturity date, it could also be turned into a claim on economic real estate ownership for any maturity date and earn a market based rent, i.e. the SwapRent rate through an exchange or a marketplace such as REIDeX. (http://www.REIDeX.com)

As a result, this new free market based operation between cash and real estate exposures could offer the collateral security that a foreign entity would need to gain confidence in holding this country’s external debt in the form of its currency, either in paper notes, coins or electronic bank records.

The new uninhibited free market based capital market operation between cash and real estate exposures through SwapRent (SM) contracts could offer the enhanced liquidity to the holders and hence further confidence than those offered by the conventional legal forms of real estate and land ownership. A SwapRent (SM) contract could therefore even become a legal tender like the country’s own treasury securities.

04/12/2011 A new exchange rate pegging system based on and backed by each country's total aggregate real estate and land value (TARELV)

This is an idea that first propped up in my head when I was a junior FX and gold options trader at Chemical Bank in the late 80’s. Puzzled and bewildered by the vague and imprecise ways that global currencies are valued, the quest for a viable alternative method has been with me throughout my entire career in the banking, risk management, financial services and real estate industries.

While I started the efforts to bring the economic advantages of financial derivatives to the mom and pop home owners after the turn of the millennium, these new exchange rate ideas have become more and more concrete but not at a degree that I could start talking about it without having a fear of being considered eccentric.

Efforts in residential real estate derivatives, institutional commercial property derivatives, SwapRent and then FARJHO have proved to be more acceptable by the masses and practical enough for making a living at the same time than devoting my spare time to creating a new jaw dropping financial instrument for the central banks. Having said that I did not foresee back then that I would be selling the SwapRent related concepts and methods as alternative economic policy management tools to many governments within the past few years either.

Rather than spending time on explaining the various problems of the existing exchange rate systems which are well known to many people already, I thought I should better focus on explaining why a new exchange rate system based on the total aggregate value of a country’s real estate and land could be better. Bear in mind that the proposed method is a suggested valuation methodology that may lead to a more precise and scientific consensus of a fair value of an exchange rate vs. that of any other currencies, the real operation of the exchange rate trading mechanism would of course continue to maintain a free market based operation.

So what are the positive arguments for a new exchange rate system based on a country’s total aggregate real estate value? Here a few starters.

1. First it simply reflects what a currency’s worth is much better with some real substance behind it. Total Aggregate Real Estate and Land Value (TARELV) reflects a country’s wealth better than a GDP number since the real estate value is more a passive investment than a GDP number that has too much volatility due to the human involvement factor. It is the same difference between an investment in a real estate property vs. an investment in a business (securities related). The business activities could go zero like a company stock could go to zero but properties would always maintain their utility value and never become zero.

2. Legally the real estate property value of a country could better serve as a collateral for the country’s currency (a form of debt) just the same way as a person’s house serves as collateral for his/her mortgage. This could inject the necessary confidence into the foreign persons that hold the country’s currency. This would serve better the financial markets better as the world moves from a one super power dominated monopolistic world to a oligopolistic world that has many economic and political powers. To further appreciate this point, one could simply imagine a person wishes to issue a currency or any negotiable instrument, it is much better if this currency is based on his house as the collateral rather than simply based on his words or his bluffing power.

3. Real estates and land are better than gold or any other commodities since real estate and land have real utility value. Gold may go back to become a useless metal when people suddenly start to realize that it is nothing more valuable than a tulip bulb. At most it could become another generic exchange medium like any other precious metals or stones in a barter like system. Its value to back other country’s paper currency from hoarding it does not make any economic sense.

4. The system may be subject to much less opportunities for manipulation by a country’s central bank’s scheming monetary policies or unscrupulous politicians’ wish to artificially depreciate and inflate out of their country’s external debts.

5. This new system would also automatically make the country’s government to direct its national resources to more productive uses to maintain the country’s economic health and steady growth by putting the Main Street economic activities on an even or higher priority with the non-productive financial asset manipulations in stock and bond markets on Wall Street.

6. The fluctuation of the exchange rates based on the real estate and land value would automatically adjust to the economic cycles in a “self-healing” fashion. When the real estate and land value declines and the exchange rate may become weak and hence may make the country’s exports more price competitive and increases its economic activities. It would also attract more foreign capital inflows. When the exchange rate increases vs. other currencies, the reverse would be true. It would become more expensive to export and hence reduced economic activities to prevent inflation from getting out of hand. There would also be more capital outflows based on enhanced investment opportunities in other countries. This would help create more global economic growth harmony since capital will flow to wherever it is cheaper to produce goods due to a temporary relatively weaker economy. This would be very different from the capital flight from a weak economy under the current exchange rate system.

To be continued …..

04/02/2011 Dispelling harmful myths about the need of a weaker currency

No other economic topic is more confusing and has been least properly understood by the public than the exchange rate system. Politicians love to use it for the opportunistic advantage it offers to blame foreigners for their fellow countrymen’s failure to economically compete. Academics love to use it to make a point for a half baked truth.

They may all have a point. The problem is that the points will all have only half of the truth. The politicians’ opponents and the academic’s rivals could all be right at the same time since there are always two sides to an exchange rate’s impact on the economy more like there are always two sides of a coin. More often than not it is completely futile to make an argument on what is better to have, a stronger exchange rate or a weaker exchange rate, for a specific short term purpose.

For short term purposes, when a country’s currency is stronger it is good for the assets and when it is weaker it is good for the country’s liabilities. A weaker exchange rate may help stimulate the domestic economy by creating more foreign demands for its commodities and goods but it will cause a permanent wholesale destruction of the country’s aggregate wealth in the global market place. A stronger currency may serve to slow down its domestic economic activities and hence lower inflationary pressure by reducing foreign demand but it may create permanent wholesale advantage and sudden increased wealth for every one of its citizens.

Over the long run, a country with a stronger currency commands confidence and respect of every human being on earth, could easily afford to develop more leading edge scientific discoveries and engineering monuments, let alone a much stronger military defence force. It also naturally speaks much louder in global politics, attracts top talents to migrate and work for it to further enhance its competitiveness. Therefore the strength of a country’s exchange rate is really a report card of its government’s performance, as fully discussed in my prior blog post on 10/15/2010, “Foreign exchange rate is the competency report card of a government’s ability to manage a country’s economy”.

So next time you read an op-ed commentary, hear a comment by a guest speaker on TV, or study an academic paper arguing for weaker currency, perhaps you would like to find out whether the person has a political agenda trying to spin a story to confuse the public or perhaps he/she is simply a complete moron.

Hoping to gain short term export advantage to create temporary transient job opportunities instead of focusing the collective efforts on increasing longer term productivity or economic competitiveness by promoting diligence, hard working ethics and/or innovations will simply continue the wholesale destruction of our country’s wealth and eventually reduce us from a major league super power to a little league weenie power.

03/30/2011 Mr. Obama, Tear down this Wall … Street! – A Matrix movie fan’s interpretation of the Bailout of Wall Street.

So Barack, or Barry rather, please allow me to be casual with you. I am no Ronald and you are definitely much more handsome then Mikhail Gorbachev without a piece of salami hanging on the forehead. I’d just like to have a frank talk with you about our country’s economic policies and Matrix the movie. Perhaps you wouldn’t mind if I call you Mr. Anderson? Neo?

First I’d like to apologize for calling you a puppet subprime President in my earlier blog dated 5/23/2009. I understand what it could be like to be the only Hussein among the establishments and I feel for you.

The frustration came from the expectation we had of you, the One would not reinsert the Prime Program back into Matrix at the Source one more time again back when we voted for you to be the President. But the opposite seems to be exactly what you have been doing. You started to look more like Agent Smith now. I hope you are a Matrix movie fan as I am and you know what I meant. If so, you may find the following analogies of our country’s Wall Street culture, your economic policies and the movie story lines interesting.

You see, Wall Street is the Matrix that has been controlling us the working class (the Humans). Out here on Main Street (Zion City) in the local communities our home ownership structure has been dominated and dictated by the exclusively debt-based mortgage industry (Zero One) created by Wall Street, Fannie, Freddie and their big bank buddies (the Machines). They have in the past been placing in their local branches those docile captured humans while keeping their minds in the Matrix in order to help the Machines disseminate the credit abuse culture and ensure their control of the Earth.

The Federal Reserve, the Treasury Department and their buddies (the Architects) has been engineering the bailouts of the crony riches, printing and pumping more money into the Matrix system to maintain its vitality and crony establishments the same way the Architects have been trying to bring you, the One, together with the Source in order to reboot the Matrix and destroy the Zion yet one more cycle, the same way all your five predecessors did.

From the Berlin Wall coming down to the recent Arab unrests in the Middle East (the Prophecy), we all have witnessed the unprecedented triumph of the people power (the Oracle) in our modern history. Despite the techie’s claims that technological developments of newer tools such as CNN in the early days to the Twitter and Facebook have made the information dissemination faster and more wide-spread, it is really the underlying force of this democratic movements driven by the people’s desire for Free Will seems to be on its way to unbalance the Matrix. You Neo are the One who has been led to the Source by the Keymaker, should not be swayed by the Architects’ assertion to reboot the Matrix again. Let me tell you why.

In our modern history, the Fed (member of the Architects) has been manipulating interest rates and the supply of money in our economy by using repos/reverse repos to implement their monetary policies and the unique Quantitative Easing programs through Wall Street dealers (the Martix) in a pattern of creations and destructions of Main Street (Zion) over and over again while rebooting Wall Street (the Matrix) with revitalized new life to maintain its status quo of the continuously enriched establishments. In particular, Bernanke’s QE and QE2 seemed to have made “Greenspan Put” a child play. Although the Matrix system does have many obvious fundamental serous problems and weaknesses but it somehow kept rebooting itself at the expense of our remaining Human Race who reside at Zion.

Whipsawing the economy is really what their monetary policy doctrine or the much worshipped Monetarism is all about. Inflating bubbles, deflating bubbles, jerking our domestic Main Street economy in the past seems to be not enough, now with the free flow of dollar-based capital, they have the entire global markets to jerk around with in the world and keep playing those same bubble blowing, popping, blowing, popping games all over again, under the disguise or the much worshipped theory called “Monetarism”. In these processes, the Wall Street insiders (the Matrix) get to reap obscene profits and revitalize itself at the expense of exploiting the Main Street (the Humans) over and over again.

Simply take a look at the recent history since Bernanke and Geithner took office. Ben has been a Member of the Board of Governors of the Federal Reserve System since September 2002 to June 2005 during the bubble building years. He became the Chairman of the Council of Economic Advisors from June 2005 to January 2006 and then became Chairman of the Federal Reserve on February 1st, 2006. Timothy on the other hand was holding the key influential role to Wall Street as the President of the Federal Reserve Bank of New York from November 17, 2003 to January 26, 2009 until he became the Secretary of Treasury Department on January 26th of 2009. Together they had been a crucial part of the front men of the Architects of the Matrix to reboot the Matrix when Matrix should have been totally destroyed should there had been no crony forces at work.

Knowing there was a housing market bubble, instead of finding viable soft landing policy alternatives, from June 30th of 2004 until June 29th of 2006 they raised the Fed Fund Rates from 1% all the way to 5.25% in order to throwing darts randomly to “pop the bubble” under the doctrines of “Monetarism”. Facing a crisis in 2007, they decided that they could build more bubbles than Greenspan ever did. From September 8th of 2007 through December 16th of 2008 until today they brought down the Fed Fund Rate from 5.25% to .025% again, under the doctrines of “Monetarism” and presumed prudent “Central Banking Policies”. Furthermore with the newly invented Quantitative Easing Programs, they have started to flood the whole world with dollar liquidity to build even more asset bubbles across the board and induce further global social instability. Until today nobody could really find out what the Architects’ true motives are.

Do they really know what they are doing or have they simply been making it up along the way? If they are so smart and love asset bubble building so much then Greenspan had ever been able to, why did they even bother to “pop Greenspan’s housing bubble” back in 2004 to 2006 to begin with? Wouldn’t it be just as convenient to leave the Fed Fund Rates unchanged and find other housing equity sharing based soft landing policies to cool down the economy instead? That would have led to a Paradise Matrix rather than the Nightmare Matrix they are turning us into now.

It is really funny to observe how the Architects have been busy congratulating and promoting themselves for a presumed job well done in preserving the Wall Street (the Matrix) to avoid a depression and dodging the fact that they were actually the very one who had created the Global Crisis of 2008 to begin with by blindly popping the Greenspan’s housing bubble through their hawkish policies between 2004 to 2006.

What they have really preserved was merely the previous Wall Street crony establishments. A depression it was not. The public certainly needs to know better that there would not have been a depression and that we would all have been better off now had the Architects not done the rescuing of the privileged few at our taxpayers’ expenses in 2008. Cronyism simply means there is an artificial human intervention of the natural selection process for the benefits of the privileged few at the expense of others. We all could live just fine without Goldman Sachs, really.

Given the current economic policies and an unknown and dangerous future for both the US and the world, have any academics been paying attention to analyze how the Architects’ economic policies to date have grossly polarized the American economy between the haves and have-nots while creating the biggest destruction of the middle class in America that have shaken the working class’s faith in Capitalism? The Matrix seems to be getting more and more unbalanced from its own exploitation.

Anyway Neo, for now you seem to have been cloned to just another Agent Smith. Until the next time we talk again, I await your next act.

03/09/2011 How convenient that PIMCO sold all their Treasury holdings to the American taxpayers! Thanks to the liquidity provided by Bernanke' QE2.

I refer to my earlier blog posts about Fed’s Quantitative Easing programs (you could also scroll down and read them below):

03/04/2011 Has Bernanke’s QE 2 shock-and-awe strategy to corner the bond market backfired?
03/03/2011 Right before our eyes – How the Wall Street elite minorities robbed us American citizens again with QE 2.
11/16/2010 The convenience of profit taking that quantitative easings have provided to the big bond fund players.
11/04/2010 What do Fed’s quantitative easings and Jerome Kerviel’s big bets have in common? Their last words: My bosses knew it all along and they didn’t stop me.

Well, exactly as predicted back in November, now the bond funds had sold them all, by the end of February. Buy-low-sell-high they did and Bernanke, on behalf of us taxpayers but without our permission, is holding the bag of those depreciated and soon sliding Treasury papers.

What is the net effect of Quantitative Easing programs so far? Those bond fund inner circle friends are laughing all the way to the banks and appeared to be investment gurus and heroes yet one more time again.

The sequence of events seem to have been staged so smoothly!

Was PIMCO simply as smart as I was back in November in thinking that Bernanke and his colleagues at the Federal Reserve and the US Treasury were suckers or is it rather that they and their Black Minerals brethren have been in bed with Bernanke and Geithner all along and thought we taxpayers could really be the suckers?

What exactly is the purpose of QE2 again? Irrespective of what really transpired behind closed doors, has it achieved it or anything positive for our American economy other than simply making the fat cats fatter?

03/04/2011 Has Bernanke's QE 2 shock-and-awe strategy to corner the bond market backfired?

As I kept searching for an answer to Bernanke’s perplexing QE 2 program for him, I could not help keep trying to find some more excuses for him. His own excuse that he wanted to help create jobs for Americans by hoping to bring the long term interest levels down simply was not convincing enough and sounded more and more absurd. Even a bozo knows more easy money and more flood of dollar liquidity will not help reduce unemployment for Americans before they create millions of jobs for the Chinese, Brazilians, Australians, Wall Street fat cats and big banks in America.

The long term interest rates went sharply higher instead, as explained in the previous blog post, making it more and more difficult for people to own homes and hence further depressed property value that destroyed the core of American wealth. Small businessmen found it harder and harder to create business opportunities and jobs across America.

The excess dollar liquidity would also only be and had indeed been sucked up by the big banks and the fortune 500 big multi national corporations who work only for their own share holders, not the American public and who create jobs only where it makes more sense at the least cost. So $600 million would not do it to create any significant number of jobs for Americans. Not even $6 trillion, before it turns the world upside down.

Meanwhile, this dollar liquidity has flooded the market and has created hyper inflation in food, clothing and energy for the rest of the world. Although the iPad economists like Bernanke keeps claiming that there is no inflation in the US after they have walked around Best Buy stores in their bargain hunting shopping trips, the majority of the world’s population does not live on notebook PCs, flat screen TVs or Groupon bargain deals.

When people can not get affordable food and basic living necessities to feed and clothe their family and themselves, social unrest ensues. It does not take a PhD to understand this. Bernanke simply needs to watch more of these extraordinary events unfold around the world by turning on his new flat screen TV that he bought on a bargain sale at Best Buy.

Will Bernanke be the person to unleash and bring out the four horsemen to our world by December 21st, 2012?

03/03/2011 Right before our eyes – How the Wall Street elite minorities robbed us American citizens again with QE 2

03/03/2011 Right before our eyes – How the Wall Street elite minorities robbed us American citizens again with QE 2

I refer to my earlier blog posts about my views and predictions on Quantitative Easing, 11/16/2010 The convenience of profit taking that quantitative easings have provided to the big bond fund players, and 11/04/2010 What do Fed’s quantitative easings and Jerome Kerviel’s big bets have in common? Their last words: My bosses knew it all along and they didn’t stop me.

Since then and now, major influential bond fund managers have successfully sold their long term treasuries in their portfolio holdings of fixed-income securities at historically highest prices to the American taxpayers and made the private club of the Wall Street riches even richer, thanks to the market liquidity using American taxpayers’ money provided to them by their crony connections with those self-professed genius policy makers at the Fed in Washington, DC.

Listening to the Humphrey Hawkins Testimony where Bernanke bewildered the Congressional gathering yet gain with the fancy excuses for the QE 2, I had to give him due credit as the Toastmaster Champion second only to Obama. While there were some questions about whether there are indeed evidences of run-away inflations and debates about how lower interest rates and the flood of liquidity could help create jobs and help the average Joe in America, nobody asked how his QE policy invention had polarized the American people to the extreme, making the rich even richer and the poors are getting nothing left but the bread crumbs.

Since my original blog post on November 16th, many of the SwapRent blog followers who are not very financial market savvy asked the question about how the QE 2 actually helped make this happen. Here is a quick explanation.

Unlike all the previous central bank’s normal activities in providing temporary money into our economic system through temporarily buying short term treasury securities from Wall Street dealers or called doing Repos (Repurchases, i.e. the securities will be purchased back by the dealers from the Fed later on) with major Wall Street dealers, the genius of the QE invention is very different from that. In it the Fed only buys long term securities permanently from bond funds, banks and other financial institutions.

The way the long term bonds behave is very differently from the short term treasury securities that mature earlier. Long term treasuries securities have the highest prices when the market interest rates are low. Their market prices become lower when the interest rates rise.

Among other maturities, 10-year treasuries bottomed some time around October last year with a daily average yield of 2.41% before QE 2 and they peaked with a daily average yield of 3.75% some time in February this year after QE 2 due to the massive dumping of these long term treasuries from the major institutional bond holders to the American taxpayers through the Fed’s QE 2 program at the historically highest prices ever.

Now marking to market of these securities, there would be tremendous losses on the Fed’s balance sheet derived directly from the QE related bond purchasing activities by the Fed. We, the American taxpayers, ended up holding the bag now again as usual and the interest rates will only be going even higher and higher from now on. The losses will only get even worse. It is really funny to think back on how Bernanke aggressively defended his QE 2 program back in November by touting that the QE 2 program would keep interest rate levels low!

Many of the major bond funds managers looked even more like real genius investment gurus these days by having dumped those long term bonds that they held in their portfolios back to the Fed. Without the $600 million liquidity provided by the Fed they would not have been able to do so this easily and at such attractive prices. Many even boasted that they have managed to halve their long term treasury holdings within the past few months. Genius they are indeed and suckers we American citizens have become again, thanks to the Fed.

I have to say there may also have been a case that the Fed itself is in the game using the QE 2 itself as a disguise so that they could help redress the Treasury Department’s or other related parties’ books under the cloak. It would be anyone’s guess since nobody could audit them to let them reveal the truth.

How come there were no questions to Bernanke from any of the Congressmen on these simple facts? As an American taxpayer, wouldn’t you want to find out more about these blatant abuses right in front of our eyes and what had really happened to our money from these Quantitative Easing inventions?