Attempting to play “catch-up” and penetrate the realities of real-life economics is frustrating beyond belief as the most critical information is often secret and closely held. As we read articles by critics such as Mike, Paul Craig Roberts, Henry C.K.Liu, Dean Baker and others, we asked questions of investment advisors based on the critics’ analyses, and most of those anxious to profit from managing our money looked at us as though we were crazy. And now, the critics are proving to have been right.

So kudos to Mike and the other critics. While I still feel something like an ant on a hot griddle, at least I know the griddle a little better.

The FED controls the money supply and “inflation” via interest rates. But before I continue about the FED, you have to understand what “deficit” means as well.

Since the days of Ronnie RayGun (Ronald Reagan), deficit spending became a mantra among those who oppose the welfare state (social spending). They falsely made it seem that deficit spending is a bad things. What deficit spending is about is that in time of falling revenue or slowing economic activity the government “primes” economic activity by increasing spending. This prevent “depression” and falling umemployment, etc.

However since the “right” hates labor and agenda is to weaken labor and the social fabric, they don’t want to see deficit spending go toward those productive endeavors. The illusion they foment is that government deficit is like household deficits — not fiscally responsible.

In actuality deficit spending can be productive if the national spending priorities where more humane and targeted toward positive uplift such as socialized medicine, free education and retraining , the arts, environmental cleanup and research & development that betters the lives of all citizens.

However Reagan was one of the biggest deficit spending Presidents next to George Bush. Yes the party of “fiscal responsibility” actually increase deficits. Why did this occur.

In Reagan’s case he convinced a largely white electorate that Welfare spending (on Negro and other undesirables) was causing the deficit and leaving a large “bill” for future generations. The Democrats obliged this rhetoric as well. However the true cause of deficit spending is the bloated spending on the military and huge tax cut (actually tax expenditures) for the rich and investor class.

Nearly 80% of the debt is attributable to military spending. Military spending does stimulate the economy but it lacks a multiplier effect that can spread itself more evenly throughout the economy. This is why the U.S. economy does more to transfer wealth to the already wealthy and why the U.S. economy is hugely unequal.

Now going back to the FED. Since the FED controls the money supply and can stimulate or can curtail economic activity, what the FED did to calm the nervous stock market (which is basically how the rich becomes richer), was to guarantee the CDOs’ and allow the banks to float the hedge funds with case in return for these bad pieces of paper. In other words these CDO’s became “money” overnight.

IMO, when the FED chooses to shrink the money supply they will retire the CDO’s and thus these debt obligation held by the hedge funds will “vanish”. However the average Joe will remain on the hook for the original debt obligation.

Wes you need to learn more about REAL economics. A great place to start to learn about the FED is “Secrets of the Temple” by William Greider

Whitney finally wrote an article without a lot of hyperbole. What I see the FED doing is to turn the CDO’s into “money” by offering to guarantee the CDO allowing the hedge funds to collateralize these debts. Then when the FED decides to shrink the monetary supply they will just remove these debt instruments off the market. In other words these bad loans will simply “vanish”.