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March 20, 2008 – Comments (0)

Just Printing Money to Pump Markets

Short covering rallies certainly played a role in the prolonged stock market run
up which followed an initial Iraqi War bombing rally in March 2003. But there is
more. A respected gold market analyst, Michael Bolser, has shown how the Fed
quite simply pumped money into the markets during this period, with massive cash
injections often timed at local stock market bottoms. His article, “Repurchase
agreements and the Dow,” should be required reading for anyone who wants to
understand rigged markets.[24] According to Bolser’s analysis, the Fed was
simply flooding the economy with liquidity just before and during that rally.
Using data available on the Fed website, Bolser plotted the injections of cash
from the Fed when it bought Treasuries on the open market, which means buying
them from the 22 banks that deal directly with the Fed. The simple buying of
existing Treasuries by the Fed is called a “Permanent Open Market Operation”
(POMO). By contrast, buying back a certificate with a specific repurchase
(buy-back) date is called a “Temporary Open Market Operation” (TOMO). Bolser
observes, “There were four closely spaced Permanent Open Market Operations just
prior to the 1,000-point mid-March DOW launch. In addition, there was another
POMO on March 13th of $710 Million coupled with a net TOMO injection of $3.25
Billion which resulted in a 303 point DOW gain on that day.”

Bolser also clarifies the relative market impacts of these cash injections:
“Permanent Open Market Operations [POMOs] are usually much smaller in magnitude
than Temporary operations but have a far greater effect on the market. Experts
have suggested that there is a nine times market multiplier effect inherent in
permanent open market operations.”
Stuffing Wads of Treasuries into Pension Fund Holes

But what about all those billions that are already parked in dollar denominated
tax havens, such as Puerto Rico? Among the Treasury Department permitted uses
of the repatriated cash, is benefit plans, including pension benefits. Most of
these plans are nowhere near recovery from losses suffered during the late
1990’s bubble. Normally, the repatriated money would go straight into the stock
market, thus pumping it--except for one thing. A number of companies do not
have sufficient money in the reserves of their defined benefits pension funds to
meet their contractual obligations to their retirees. If a pension fund goes
broke, a federal agency, the Pension Benefit Guaranty Corporation (PBGC) takes
on some of the obligations—typically pensioners collect 25 cents on the dollar.
But the PBGC is itself broke, with companies defaulting or threatening to do so.
For example, the PBGC has moved to take over the defined benefits pension funds
of United Airlines.[25] And this is probably just the start of many such
takeovers. By November 2004, the plans PBGC insured were under-funded $450
billion, an increase of $100 billion in just one year. Companies whose debt was
evaluated at less than investment grade (a group that could soon include General
Motors) were under-funded by $96 billion, an increase of $12 billion from the
previous year.

So the PBGC could require another gigantic federal bailout, “Some have compared
this to the savings and loan crisis of the early nineties,” said James Moore,
who is in charge of pension products at a major bond fund, Pimco.[26]

But the U.S. government is also broke—because of Bush’s pro-war, anti-tax policy
combination. Are there solutions? Sort of. One is just to fake the numbers,
reducing the required reserves in these pension funds. Bush also plans to change
the rules for investing for defined benefits pension plans in a way to reduce
their likelihood of defaulting. Stocks can be down when pension payout demands
are up. The right kind of bond could deliver the money at the right time. The
new rules have not yet been announced, but seem certain to encourage the buying
of Treasury Inflation Protected Securities (TIPS) by the depleted pension funds.
Some funds are already jumping in to avoid even higher prices later. With the
long dated TIPS pumped, the dollar looks less unattractive to Chinese and
Japanese central banks and others. Masayuki Yoshihara, who manages, with others,
over $9 billion at Japan’s fourth biggest life insurance company, Sumitomo Life
Insurance Company, said “Pension funds will continue to be overweight the
long-end of the curve. We expect the yield curve to flatten even more,” [27]
What? Translating from finance-ese, he says that pension funds will keep buying
long dated Treasuries, which will pump up their price and thus reduce their
effective interest yield. (The interest is fixed, literally printed on the bond.
So if buyers pay more to get the same printed interest rate, their effective
yield goes down.) With long term interest rates falling and short term ones
rising, the graph which represents these rates is becoming more and more of a
flat straight line.

So there are a lot of relatively new sources of money for official manipulation
of markets: federal contractor pension fund money, nicely insured under CAS;
POMO and TOMO money, freshly printed by the Fed; the American Jobs Creation Act
money, conveniently parked off shore; trading “partner” money, sometimes
willingly given, sometimes extorted.

One nice thing about rigged markets is that they permit updating trite stock
market axioms, such as “Buy on the rumor, sell on the news.” For Treasuries,
this has now become, “Buy on the rumor, buy again on the news, and then sell it
to the Chinese or Japanese central banks.”

All who imagine that the mythical market forces will prevail seem to
deliberately avoid actually looking at what the so called markets really are,
including their concentrations, Plunge Protection mechanisms, and Plunge
Protection’s extensive access to a variety of pools of other people’s money.
The mechanisms and the market concentrations permit the Bush administration to
systematically sell off U.S. assets to pay for its more wars/less taxes
policies. The Bush administration is comparable to a group of corrupt trustees
for the family fortune of a lazy and incompetent heir. They siphon the money out
by selling off the inheritance while the heir is too stupid or drunk to notice.
He still has his mansion, his fleet of big cars and his monthly check, and he
doesn’t notice that the assets are shrinking. He may not for a while. This
family’s fortune is big and there are a lot of assets still to sell off.

© 2005 Robert Bell

Robert Bell, Chairman of the Economics Department, Brooklyn College, N.Y., is
the author of seven books, including: Beursbedrog (The Stock Market Sting), De
Arbeiderspers, Amsterdam, 2003; Les peches capitaux de la haute technologie (The
Capital Sins of High Technology), Seuil, Paris, 1998; Impure Science, Wiley,
N.Y., 1992


[1] See “The U.S. Government’s Bubble Blowing Machine.”
[2] “U.S. Dollar Becomes Dependent on Handful of Central Banks,” Financial
Times, 24 January 2005, p. 2
[3] “Treasuries Drop Before U.S. Begins Auctioning $51 Billion of Debt,”, 8 February 2005
[4] “U.S. 10-Year Treasury Note Rises on Optimism For Tame Inflation,”, 7 February 2005
[5] “…aujourd’hui, les actionnaires sont cantonnes das un role de
quasi-spectateur. Les petits actionnaires – que l’on appelle aujourd’hui <<
actionnaires individuals >> savent qu’ils ont peu de poids. Tous ensemble, ils
ne representent que quelques pour cent du capital car l’investissement des
ménages est de plus en plus sous forme de Sicav, de fonds communs de placement
ou d’assurance vie. Les acctionnaires, aujourd’hui, ce swont donc les
investisseurs institutionnels.” (p. 187)
[6] “Nous ne sommes plus, en effet, dans le monde que l’on decrit dans les
manuels d’economie, avec des investisseurs innombrables aux determinismes
varies, choisissant chacun a sa maniere les titres qu’il va mettre en
portefeuille – la resultante de leurs millions de decisions generant une sorte
d’equilibre de marche changeant, mais stable ! La verite, c’est que, depuis
quelques annees, l’investissement raisonne sur une valeur a presque disparue au
profit de comportements de plus en plus mecaniques.” (p. 122)
[7] “$1.3 trillion deficits forecast over decade,” 25 January 2005
[8] “Dollar Rises Versus Yen; Chin’s Zhou Says Yuan Not Undervalued,” 7 February 2005.
[9] “Koizumi puts markets in spin,” Financial Times, 11 March 2005, p. 1
[10] “Feisty Greenback Inches Ahead,” Financial times, 24 February 2005, p. 30
[11] “Central Banks Seek to Calm Dollar Fears,” Financial Times 24 February
2005, p.7
[12] “Dollar Has Weekly Decline on Concern Banks May Slow Purchases,” 26 Feb 2005
[13] “Russia Ends De Facto Dollar Peg and Moves to Align Ruble With Euro,”
Financial Times, 6 Feb 2005
[14] “Jusqu’a present, il s’agisait du grand pari adopte par la quasi unanimite
des cambistes: le dollar baissera en 2005.”
[15] “U.S. Tax Amnesty Could Rake in $100 Billion,” Financial Times, 31 January
2005, p. 17
[16] “Repatriated Cash Raises M&A Hopes,” Financial Times, 31 January 2005
[17] “U.S. Tax Amnesty Could Rake in $100 Billion,” Financial Times 31 January
2005, p. 17
[18] Andrew Coggan, “The Short View,” Financial Times 12 February 2005, p. 15
[19] “U.S. Tax Amnesty Could Rake in $100 Billion,” Financial Times 31 January
2005, p. 17
[20] “Repatriated Cash Raises M&A Hopes,” Financial Times 2005
[21] “U.S. Tax Amnesty Could Rake in $100 Billion,” Financial Times, 31 January
2005, p. 17
[22] “Positive Signs For Dollar Emerge,” Financial Times, 21 January 2005, p.
[23] “Positive Signs For Dollar Emerge,” Financial Times, 21 January 2005, p.
[25] “Battle over United pension plans heats up,” Financial Times, 12-13 March
2005, p. 8
[26] “A Case of Pension Deficit Disorder,” Financial Times, 24 February 2005, p.
[27] “Treasuries May Fall Amid Concern Demand Will Fall At Auctions,”, 9 February 2005
[i] Claude Bebear, Ils vont tuer le capitalism, Plon, Paris 2003, p. 186
[ii] Claude Bebear, Ils vont tuer le capitalism, Plon, Paris 2003, p. 122
(translated from the French by R. Bell)
[iii] “The Exchange Stabilization Fund: How It Works,” Economic Commentary,
Federal Reserve Bank of Cleveland, December 1999

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