Dear Reader,

I just finished watching the nearly three-hour House Financial Services hearing on monetary policy. It wasn’t exactly as exciting as the new Harry Potter movie, but there were plenty of warlocks, witches, and trolls present – and many fairy tales were told.

I was hoping to see Bernanke really get grilled. Just think about everything that’s happening in monetary policy right now: the Greek crisis; rising interest rates around the world; the end of QE2; and record-low interest rates in the U.S. Surely one could ask Bernanke hours of questions on these matters. But what did our congressmen do with this rare opportunity? They squandered it with questions over raising the debt ceiling. Yes, that’s important, but it’s probably better left to its own debate.

As a result, almost the entire hearing focused on fiscal policy rather than monetary policy. Many congressmen just wanted to hear themselves speak, share their best one-liners, and recount stories from their districts. Of the nearly three-hour event, approximately two whole hours pertained to the debt ceiling. The Democrats tried to bait Bernanke into stating that higher taxes were necessary and cuts were particularly bad for jobs. The Republicans tried to get him to endorse immediate cuts now.

In both cases, Bernanke didn’t budge. The representatives asked the same questions over and over. Bernanke responded in pretty much the same way every time: These are fiscal issues for Congress to figure out, not the Fed.

There were a few moments worth noting. First, as mentioned yesterday, Ron Paul asked Bernanke (at about 4:55), “Do you think gold is money?” Bernanke says no and defends the Fed’s gold holdings as mere tradition. If that’s the only reason, they should have thought about selling the gold a long time ago.

Another notable part was Representative Green’s defense of the bank bailouts. He told Bernanke, “I think history will be kind to you.” It’s always entertaining to hear the rehearsed lines of the paid banking shills in these committees. In the last election cycle, Bank of America was Green’s number-three top donor with $10,000. Furthermore, Green received campaign finances from Omni Bank, Wells Fargo, Capital One, Encore Bank, Zions Bancorp, and the American Bankers Association.

In another interesting exchange, Maxine Waters pressed Bernanke on why minority banks were not given more funds from the bailouts. I didn’t think that it was possible to bring racial politics into monetary policy, but then again D.C. never fails to surprise me. Waters asked if Bernanke can provide a figure on African-Americans who received funds. He responded, “I’m not sure we can because we lent to companies with lots of shareholders, and I’m not sure that we can identify the race of the shareholders.”

In my opinion, no one should be getting bailouts, but Waters’ world view is frightening. Imagine a world where future bailouts are determined by the color of the owner’s skin rather than qualifications, the urgency of the situation, or the systematic nature of the institution.

Furthermore, it would be extremely hard to prove any sort of discrimination here. The Federal Reserve gave money to Bahrain and Libya. That really says it all: Everyone was getting the Fed’s money.

The most impressive comments came from freshman Congressman Sean Duffy. Now, my generation is probably a little more familiar with Duffy than the population at large. Some may remember him from MTV’s reality show, The Real World: Boston. Hey, Reagan was an actor – maybe reality-TV-star-turned-politician is the wave of the future.

Anyhow, Duffy’s questions for Bernanke were the best. He pointed out that uncertainty is hindering job growth. Uncertainty about healthcare laws, inflation, future interest rates, regulations, and the growing debt burden are impeding progress. He also prodded Bernanke on printing money.

Most readers have already read about Bernanke’s QE3 statement – that it’s not off the table. Guess who got him to say it: Sean Duffy. In the whole three-hour hearing, he was the first person to ask Bernanke about QE3. Though the whole meeting saw no progress on the debt ceiling, Duffy shook the market by getting Bernanke to mention QE3. Congrats to Duffy. Check out the hearing in the links section below to see his showdown with Bernanke.

For the rest of the issue, Doug Hornig will discuss the ceiling, and where the money has been coming from in the past few months. Note his opening line in regard to the monetary hearing just described above.

The Looters

By Doug Hornig

Lately, every second dispatch out of Washington D.C. has involved the debt ceiling. For anyone who’s been living under a Martian rock for the past two months, the federal government reached the statutory limit of what it’s able to borrow back in mid-May. In other words, without running up further debt, it can’t pay its bills. But the law prohibits the issuance of any more funny paper. Impasse.

This has happened in the past, and it has always resulted in an increase in the debt ceiling. Now we’re bumping our heads against it one more time. Unless that limit is raised, and soon, the “full faith and credit of the U.S. government” will be a thing of the past as the Treasury begins to default on its obligations.

President Obama and the Republican leadership in the House have been at loggerheads over this issue. The GOP wants drastic spending cuts to the federal budget before it agrees to raise the limit; Obama wants some form of tax increases to make the cuts more palatable. Both sides throw out words like “non-negotiable.”

‘Round and ‘round it goes – with each party accusing the other of holding the American people hostage to its ideological agenda – but where it stops, everyone knows. Some kind of deal will ultimately be struck. The limit will be raised, the government will get the extra money it needs to further bloat its spending programs, the levers of power will be greased, and life will go on. That’s what all involved want. For the most part, the rest is grandstanding for the folks back home.

But do you see the more interesting question here? If not, go back to that first paragraph and reread it. See it now?

Right. The debt limit was reached on May 15. So how come the defaults didn’t begin immediately? Who’s been paying the bills in the meantime?

Did you guess that, some way or other, we have? You’re pretty much correct. If you were reading the newspaper back in May, you might have seen a small reference to a statement from Treasury Secretary Geithner to the effect that he could delay the day of reckoning until August. You probably didn’t see any specifics, but some kind of accounting gimmick was involved, you were led to believe. No biggie. Don’t worry.

In fact, what happened was that Geithner declared a “debt issuance suspension period” (DISP), to be in effect from May 16 to August 2. No new debt would be issued. Ok, that sounds good. But what about the aforementioned bills that would come due in the interim?

Well, as Geithner explained in a letter to congressional leaders, during this period the Treasury “will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF, as authorized by law.” And he went on to say the same regarding the “Government Securities Investment Fund [‘G Fund’] of the Federal Employees’ Retirement System.”

The CSRDF is the Civil Service Retirement and Disability Fund. The G Fund is part of the Thrift Savings Plan. Though there are some differences in employer vs. employee contributions, both are basically pension plans for civil service employees. And both have basically been looted.

Here’s what happened to the former (figures are for the end of the month):

As you can see, at the end of last year, the CSRDF held over $775 billion in assets. The Office of Personnel Management estimated at that time that the total would swell to $806B by the end of this year. They may have a tough time getting there. Note the $22B drop in May – that’s the DISP at work. And it’s gotten worse since. According to the just-released Monthly Statement of the Public Debt, as of the end of June, the Fund had plunged to $680B. More DISP.

The situation over at the Thrift Savings Fund? Check this out: Around $130B in assets at the end of April shrank to less than $75B by May 31. And it gets worse – the June report shows a meager $27B left in there.

So, prohibited from issuing debt, the government raided – excuse me, borrowed from  –people’s retirement funds instead. And they took a lot. More than $180 billion. Of course, in Secretary Geithner’s encouraging words: “Each of these actions has been taken in the past by my predecessors during previous debt limit impasses. By law, the CSRDF and G Funds will be made whole once the debt limit is increased.”

Perhaps so. But these sorts of shenanigans do not exactly inspire trust in our financial overlords. They suggest desperation. And they also raise some disturbing possibilities.

Consider that while the Treasury lists the CSRDF under “Government Account Series – Intragovernmental Holdings,” the G Fund is denoted a “Government Account Series – Held By the Public.” That is more or less people’s personal money. One would be forgiven if one thought that, despite Geithner’s historical precedents, it should be off limits to government fingers.

If civil service pension funds can be molested, what about IRAs? Some have suggested that the government is already eyeing our private retirement accounts, to see what might be gotten out of them. Washington created them; it can change the rules any time it wants… to require, say, that a certain portion – or all – be invested in government paper. What a windfall that would be.

In the end, “debt issuance suspension,” a term no one will ever remember, could turn out to be the wellspring from which all manner of mischief flows.

[With the U.S. government sure to keep at its “spend and pretend” ways, every investor must find some means of protecting his assets from their predations. The Casey Report focuses on identifying emerging trends on the global scene, making a risk-free, ninety-day trial subscription an invaluable tool. Learn more here.]

Additional Links and Reads

Ben Bernanke July 13th Testimony (House Financial Services Committee Site)

Bored today? I mean really bored? Here’s the link to the entire House Financial Services hearing on monetary policy. The best part worth catching is Sean Duffy’s performance at the 2:02:00 mark; it lasts about five minutes.

Minnesota Wi-Fi Hacker Gets 18 years in Prison for Terrorizing Neighbors (Digital Trends)

As most of our readers know, we’ve been following stories on computer security and hacking. This sort of stuff will continue to get more and more attention. The link above is particularly startling. A Medtronic computer tech terrorized his neighbor by hacking his Wi-Fi connection:

The man, a Medtronic computer technician, downloaded a Wi-Fi hacking program to tear into his neighbors [sic] WEP encryption. Ardolf created a fake Myspace page as well as several fake emails for Matt Kostolnik. The hacker then posted child porn on the Myspace page and emailed the same child porn to co-workers at Kostolnik’s law office.

To top it all off, the Blaine hacker sent death threats to Vice President Joe Biden and other politicians from Kostolnik’s Yahoo account. This granted Kostolnik a visit from the secret service who had traced the emails back to his IP address. One of the emails told Biden, “I swear to God I’m going to kill you!”

On Deficit, Americans Prefer Spending Cuts; Open to Tax Hikes (Gallup)

Gallup has a good poll about opinions on deficit reduction. It’s useful as big-picture look at the debate; however, it doesn’t tell the whole story. What funds should be cut and who should be taxed are the big questions. It’s easy to say in theory that deficit reduction should be a mix of taxes and spending cuts, but things get politically complicated when certain programs and groups are specifically named.

That’s it for today. David Galland will be gone for the next two weeks; hence, I’ll be writing the Friday editions as well. Thanks for reading and subscribing to Casey Daily Dispatch.

Vedran Vuk
Casey Daily Dispatch Editor