Killer Combo of High Gas, Food Prices at Key Tipping Point

The combination of rising gasoline prices and the steepest increase in the cost of food in a generation is threatening to push the US economy into a recession, according to Craig Johnson, president of Customer Growth Partners.

Gas station in San Francisco.

Johnson looks at the percentage of income consumers are spending on gasoline and food as a way of gauging how consumers will fare when energy prices spike.

With gas prices now standing at about $3.90 a gallon, energy costs have now passed 6 percent of spending—a level that Johnson says is a "tipping point" for consumers.

"Energy is not quite as essential as food and water, but is a necessity in today's economy, and when gasoline costs more than bottled water—like now—then it takes a huge bite out of disposable spending," he said, in a research note.

Of the six US recessions since 1970, all but the "9-11 year 2001 recession" have been linked to—of not triggered by—energy prices that crossed the 6 percent of personal consumption expenditures, he said. (During the shallow 2001 recession, energy prices had risen to about 5 percent of spending, which is higher than the long-term 4 percent share.)

What may make matters worse this time around, is there has been a steep increase in food prices that occurred as well. In other recent recessions food costs were benign, at between 7.5 percent and 7.8 percent of spending.

This year food prices have climbed 6.5 percent since the beginning of early January, according to Consumer Growth Partners.

"The combined increase in the necessities of food and energy creates a harsh double whammy for already stressed consumers," Johnson said. The last time this happened was in the recession that lasted from 1973 to 1975.

Johnson estimates that food and energy eat up about 15 percent of consumer spending at today's prices, compared with about 12.7 percent two years ago.

Of course, at lower income levels, these percentages are much higher. One sign of the stress some consumers are already feeling is that some AAA offices have already seen an increase in out-of-gas service calls, as motorists try to put off filling their tanks or drive around trying to seek out the gas station with the least expensive price.

Also some regions are being hit harder than others. Gas prices in Hawaii continue to set new highs, according to AAA data. The average price on Wednesday was $4.51, topping the prior record of $4.50 for a gallon of regular unleaded set in July 2008.

25% Of Scotia Mocatta's Silver Transferred From "Registered" To "Eligible" Status: A 45% Reduction In "Physical"

Something interesting appeared in the daily NYMEX report of its silver warehouse stockpile data: Canada's largest bullion depository (and one of five total) reclassified a whopping 5.2 million ounces of silver from Registered to Eligible status. In order to get a sense of how big this amount is, which amounts to just under $238 million at today's fixing price, it represents just over 25% of the total silver stored at Scotia Mocatta, and about 5% of the total silver held across all depositories. The reason for this substantial shift is given as follows: "due to a reporting reclassification, 5,287,142 t oz was moved from Registered to Eligible." That's a pretty substantial reporting reclassification. Of course it could well be nothing but that, although one would imagine that a fat finger is somewhat unlikely when it comes to such a material amount. On the other hand, as those who follow the NYMEX data know too well, registered silver is actual physical Comex silver. Eligible on the other hand is sometimes called "someone else's silver" as it does not go through assays on exit/selling events. In other words, this is silver that can not be used to make delivery under a futures contract. As a result of this reclass, total registered silver dropped by 13% from 41.0 million ounces to 35.8 million. Assuming one does not have full faith in the simple error story, does this mean that deliverable silver just dropped by 13% overnight (this event occurred yesterday, but was reported as usual with a 24 hour delay)? And if so, is this effective transformation of physical to semi-paper silver indicative of what we may expect from other depositories in the next few days as the delivery notices start coming in?

Snapshot of silver holdings (link):

For those who are confused about the distinction between the two categories, SilverAxis has done a good analysis:

For those who aren’t familiar with the terminology, the registered category of COMEX warehouse bullion stocks generally refers to gold and silver bars against which COMEX warehouse receipts are outstanding. The COMEX publishes these stocks on a daily basis and they can be found here: Silver | Gold. The registered category is the total pool of gold and silver available at any time to meet delivery requirements under expiring futures contracts or to establish initial futures contract positions through a transaction called exchange-for-physicals (I’ll explain this another time). It is important to realize, however, that many parties holding COMEX gold and silver in registered form have no intention of making their holdings available for delivery. By this I mean that such parties are neither (1) holding a short futures position against the warehouse receipt nor (2) willing to sell their registered metal (warehouse receipts) to a party with a short futures position. Indeed, a substantial portion of those holding registered metal would have acquired the COMEX warehouse receipts by holding long futures positions for delivery. In other words, these registered stocks are held for investment and not for commercial purposes.

In comparison, the eligible category of COMEX warehouse bullion stocks generally refers to bullion held in the warehouses that meets the specifications of an acceptable COMEX bar (proper weight, size, purity and refiner) but does not have a COMEX warehouse receipt issued against it. For example, an investor might purchase several 1,000 oz. bars of silver from a dealer and then deliver the bars for allocated storage at a COMEX warehouse. This is a private arrangement and has nothing to do with the COMEX. Unless these bars are officially registered (the easiest way to do this is through the aforementioned exchange-for-physicals), they will remain in the eligible category until withdrawn from the warehouse by the investor. Thus, the appropriate way to treat eligible COMEX warehouse bullion stocks is that they represent metal that could potentially be registered at some point in the future but cannot presently be used to make delivery under a short futures contract.

We will follow this curious development which had not occured prior to silver entering its "parabolic" phase.

P.S. For those curious, Scotia Mocatta had a comparable "glitch" affecting its gold stocks, where 13% of its registered gold mozzied off to eligible status.

h/t DrDerivative

CHART: U.S. Military Spending Vs. The World

The increase in 2010 is almost entirely down to the United States, which accounted for $19.6 billion of the $20.6 billion real-terms increase. Excluding the U.S., the total in the ‘rest of the world’ barely changed in 2010, increasing by a statistically insignificant 0.1 per cent.

Greg Scoblete summarizes the rest of the world:

The Stockholm International Peace Research Institute has a new report out highlighting global military expenditures. As the above chart indicates, the U.S. retains a healthy lead.

Regionally, defense spending in Europe has fallen 2.8 percent while spending in South America has risen by 5.8 percent and in Africa by 5.2 percent. Brazil drove a lot of the South American growth. Asia rose only a modest 1.4 percent, which the Institute said was slower than previous years. Overall, global military expenditures ticked up slightly at 1.3 percent, the slowest growth rate since 2001.

CHART: Ten Years, Ten Increases In The Debt Ceiling

A 2nd chart we posted last week...

Watch The U.S. Debt Clock Tick Above $14.5 Trillion

http://dailybail.com/home/watch-the-us-debt-clock-tick-above-145-trillion.html

Diagnosis Negative: Severe case of debt, contagion risk remains elevated.

Nothing to see here. Move along. Continue shopping.

Wall Street Foreclosure Fraud Gone Wild — Bank of America Forecloses On Man Who Has No Mortgage

A few days ago I reported Federal Judges have finally started cracking down on Wall Street banks committing widespread mortgage foreclosure fraud.

3 different cases finding Wall Street bankers committing mortgage foreclosure fraud in the last month. Among the culprits U.S bank, GMAC, JPMorgan, Chase and WAMU.

Amazing… Everyone of these banks held out their hands for TAXPAYER bailout money.

Now that the tables are turned they are all committing fraud to foreclose on people’s homes.

I followed up on that story with even more fraudulent Wall Street Foreclosure Fraud which has halted banks from Foreclosing on homes in 23 states.

But Just How Bad Is Wall Street Foreclosure Fraud?

Boing Boing helps us answer the question in the article Bank of America forecloses on a man who has no mortgage.

Jason Grodensky, a Fort Lauderdale man who bought his house with cash last December was surprised to discover that Bank of America had foreclosed on him, though he has no mortgage. Florida’s foreclosure mills being what they are, the checks and balances against erroneous foreclosure have eroded to the point where banks can seize and sell homes they have no interest in.

Grodensky’s story and other tales of foreclosure mistakes started popping up recently across South Florida. This week, GMAC Mortgage — one of the nation’s largest mortgage servicers and a major mortgage lender — told real estate agents to stop evicting residents and suspend sales of properties that had been taken from homeowners in foreclosure. The company said it might have to “correct” some of its foreclosures, but was not halting those in process.

…

And the legal efforts required to resolve a foreclosure mistake are complicated. “Unwrapping it is like unwrapping Fort Knox,” said Carol Asbury, a Fort Lauderdale foreclosure attorney. “It’s very difficult.”

That’s right. As the Sun Sentinel reports this man’s home foreclosed on him even though there was no mortgage on his home and he bought his house with cash.

When Jason Grodensky bought his modest Fort Lauderdale home in December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage.

Grodensky knew nothing about the foreclosure until July, when he learned that the title to his home had been transferred to a government-backed lender. “I feel like I’m hanging in the wind and I’m scared to death,” said Grodensky. “How did some attorney put through a foreclosure illegally?”

Bank of America has acknowledged the error and will correct it at its own expense, said spokeswoman Jumana Bauwens.

Imagine that.

Living in your home which you own free and clear.

Then you find out you are being evicted and the deed to your house has been transferred to some government backed lender.

When you ask for answers information is locked down as tight as Fort Knox and no one will give you any answers on how it happened.

Only in America…

Thumbnail credit: Jason Grodensky had bought the Fort Lauderdale home with cash last December, then says his home was sold out from under him. (Robert Duyos, Sun Sentinel / September 19, 2010)

McDonald's warns of higher food inflation

LOS ANGELES/NEW YORK (Reuters) - McDonald's Corp (NYSE:MCD - News) forecast higher prices for beef, dairy and other items and said it would cautiously raise prices to keep attracting diners, who are grappling with higher grocery and gas bills.

Shares fell 1.5 percent after the world's biggest hamburger chain said it planned to offset some, but not all, of its higher food costs, with small price increases throughout the year.

McDonald's results landed a day after rival Yum Brands Inc (NYSE:YUM - News) reported strong China results that masked rising food and labor costs. Chipotle Mexican Grill (NYSE:CMG - News), which has nearly all of its 1,100 restaurants in the United States, saw higher food costs eat into margins.

McDonald's and other restaurant operators are getting squeezed by accelerating food costs and must figure out how to raise prices without scaring away already skittish diners.

"It's very hard to pass through price increase right now," said Stifel Nicolaus analyst Steve West.

McDonald's Chief Executive Jim Skinner said customers are getting "pinched everywhere. They should not suffer the same fate at McDonald's."

Chief Financial Officer Pete Bensen said the company would sacrifice some short-term margin to protect long-term growth. He added that McDonald's has experience finding the right recipe for price increases in fragile economic times.

McDonald's now expects food costs to rise between 4 percent and 4.5 percent in the United States and Europe this year. That is up from its prior call for a rise of 2 percent to 2.5 percent in the United States and an increase of 3.5 percent to 4.5 percent in Europe.

McDonald's in March put through a 1 percent menu price rise in the United States, where it plans additional increases. Prices in Europe are up by the same amount and the company plans to raise prices in China.

When it comes to raising prices, West said McDonald's has an edge because it attracts a higher-income diner than other fast-food chains. It could have the best luck raising prices on things like premium burgers and McCafe drinks that appeal to those customers, he said.

STEALING SHARE

After struggling during the recession, McDonald's has outperformed its fast-food peers by updating its menu to broaden its appeal beyond the young males that account for the biggest share of sales at most other fast-food chains.

"The bottom line is they're still doing a great job of growing revenue," said Peter Jankovskis, co-chief investment officer at Oakbrook Investments.

Analysts remain worried that high gas prices could force fast-food restaurant patrons to cut back. But Jankovskis said McDonald's was better equipped than others to cope.

McDonald's has roughly 32,700 restaurants around the world. The United States alone has 14,000 units, which means customers do not have to travel far to get to one.

"The big test will come in the summer months with gasoline remaining in the neighborhood of $4.00 (a gallon) -- that's when the strength of McDonald's will come through," he said.

March sales at restaurants open at least 13 months were up 3 percent in the United States, up 4.9 percent in Europe and gained 0.5 percent in McDonald's Asia/Pacific, Middle East and Africa unit. Asia results were adversely affected by the earthquake and tsunami in Japan, but that the impact on overall income was "minor," Skinner said.

First-quarter net income rose 10.9 percent to $1.21 billion, or $1.15 per share, topping analysts' profit view by a penny, according to Thomson Reuters I/B/E/S.

Total first-quarter revenue at the Golden Arches rose 9 percent to $6.1 billion, with sales in Europe leading the way.

Still, operating margin fell to 17.7 percent from 18.2 percent as costs for food and paper rose. Food and paper costs were 33.6 percent of sales in the quarter, compared with 32.9 percent a year earlier.

McDonald's shares fell 1.5 percent, or $1.17, to $76.23 in midday trading on the New York Stock Exchange.

(Editing by Maureen Bavdek and Gunna Dickson)

Phone workers facing the axe told: 'You can move to the Philippines... and it includes a RICE allowance'

Workers facing the axe at a mobile phone company have been offered alternative employment in the Philippines.

Staff at the Orange customer service centre in Darlington, County Durham, say they were even given details of a 'rice allowance' they could claim as part of the 'transfer' package to work for IBM in Manila.

Orange, which last year merged with T-Mobile to create Everything Everywhere, recently confirmed that 40 staff would be affected by plans to outsource some work abroad.

A long way from Darlington: A shanty town under a bridge in Manila, the Filipino capital, where Orange customer service staff say they were told they could move

Job losses: Orange offices in Darlington where staff facing the axe complain of shoddy treatment

The Darlington jobs are being moved to the firm's service partner, IBM, based 7,000miles away in the Philippines.

Staff were told they could move to the new customer services hub in the Far-Eastern country. They were also offered alternative roles elsewhere in Britain.

So far, a small number of staff have accepted severance packages, while others have moved jobs.

Others affected have been placed on 'special leave', receiving basic pay while they consider their options.

One employee, who did not want to be named, said staff were angry with the way the situation had been handled by the company.

She said: ‘It is a complete joke. No one in their right mind would want to move to Manila.

‘When we asked for details of the transfer package we were handed a sheet of paper with what the IBM employees receive, which is less than £200 a month, with a rice allowance and a laundry allowance.

‘That's not a transfer package, it's a job description for someone who works for IBM in Manila.

‘People are really upset about the way the whole process has been handled.

‘It is appalling, we have had to fight for information about a number of things all along the way.

‘People have naturally been worried about their job and have been told things like "If you hate it so much, why are you here?" '

Some staff also claim severance packages are less than previously accepted by workers who have left Orange.

Enlarge

The Darlington jobs are being moved to the firm's service partner, IBM, based 7,000 miles away in the Philippines

Staple: Rice, seen growing near the foot of the Mayon volcano, is such an important crop in the Philippines that many workers are offered an allowance

Darlington MP Jenny Chapman said: ‘I am lost for words. It is hard to take this Manila move seriously, or consider it as a credible proposition.

‘I really cannot imagine people working in the offices of Darlington Orange considering moving to the Philippines.

‘I would be fascinated to find out how many people take them up on this offer.’

An Orange spokeswoman when pushed on the issue this afternoon said: 'This was an HR error, for which we apologise.

'We are in contact with the 40 employees involved and will be making it clear that we’re not proactively asking or expecting people to move to Manila.

'The information given out was not done officially and we apologise to those involved.

'In the case of work transferring locations, the individuals do have the right to request moving with that work, and we have a duty of care to discuss the option.'

The spokesman added: 'We are proposing some operational changes to our nightshift customer services for the Orange brand.

'We are creating a dedicated 24/7 Business Technical Support Team to handle the calls from business customers with eight new roles.

'The remaining overnight consumer calls will in future be handled by an existing outsource partner in Manila during their daytime hours.

'We are continuing discussions with a very small number of employees who have expressed an interest in the option of transferring to Manila, but they still have an option of a UK role or severance package if they prefer.'

She said anyone taking an alternative daytime role within the company would receive additional payments for three months to cover some of the difference in night-time shift earnings and full details of severance packages had been given.

Orange said individual consultations with staff who had not yet decided on their preferred option had been extended and the end of the consultation date had been communicated to employees so they had full notice.

Orange cut 120 jobs in Darlington last year and has faced a series of allegations from staff who say consultation has been inadequate and rushed and complain of shoddy treatment.

It is understood that some employees have sought legal advice while the conciliation service Acas was also approached to act as a go-between. The company said that its services have not been required.

Citigroup investigated by Greece on debt restructuring rumours

Citigroup is being investigated by the Greek authorities after one of its staff warned the bank's clients of the possibility of the country announcing a debt restructuring this weekend.

Many market observers already believe some form of Greek debt default is now inevitable, a year after the country's multi-billion euro bailout by the European Union that sparked nationwide protests against austerity measures.

"There seems to be some increased noise over Gr debt restructuring as early as this Easter weekend," wrote the Citigroup employee, adding that Greek officials were denying that they had any such plans.

The email prompted Greece's finance ministry to ask the local prosecutor to launch an investigation into the market rumours, which the country blames for its continued economic woes.

In a statement Citigroup said: "We are co-operating with the authorities and do not consider there to have been any wrongdoing by Citi or its employees."

The investigation came as Greek credit default swaps hit a record high of 1,335 basis points, up 53 points, meaning the annual cost of insuring £10m of the government's debt would cost more than £1.3m.

Many market observers already believe some form of Greek debt default is now inevitable, a year after the country's multi-billion euro bailout by the European Union.

In another note to clients, Citigroup on Thursday said it thought the chances of a "debt event" before the end of the year were rising.

Most expect the Greek government and its creditors to agree to a rescheduling of the country's debt repayments to help it meet its obligations.

Dad's car clamped after pulling over as his son had coughing fit

A DRIVER was immediately clamped and hit with a £375 fine after he stopped to help his sick toddler.

Jaffer Khan, 36, pulled over so he could turn round to see his three-year-old son, who was having a coughing fit.

But the car park he entered in Ilford, Essex, was patrolled by a clamping firm.

He said: “It was without warning. I just got a tap at the window once they had done it. They said they’d called a tow truck. I felt like crying.”

He eventually negotiated to pay £250 for his VW Polo to be released.

Chinese dumping worthless currency for gold (17May10)

Chinese govt advise gold buying - why? What is their plan?

Federal Reserve Needs To Cut US Dollar In Half Over Next 14 years

Barack Hussein Hoover?

Is the world headed for a debt crisis to dwarf the one that befell us in 2008, when Treasury Secretary Hank Paulson stood aside and let Lehman Brothers crash?

No one knows for certain. As Yogi Berra said, "it's tough to make predictions, especially about the future."

But the probability of a financial crisis increased this week after President Obama's trashing of Rep. Paul Ryan's deficit reduction plan as dragging us all back to the Dickensian days of "Oliver Twist."

For the savagery of Obama's attack persuaded Standard & Poor's to begin to move to downgrade U.S. sovereign debt from the triple-A rating it has held since Pearl Harbor.

The British newspaper The Guardian wrote of the dramatic news:

"With the political infighting between the Republicans and Democrats on the deficit now so bitter that there was a risk of the US government being shut down earlier this month, S&P said it had taken the decision to change its outlook because 'the path to addressing these issues is not clear to us.'"

"We believe there is a significant risk," said S&P credit analyst Nikola Swann, "that congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the 2012 congressional and presidential elections."

Obama adviser Austan Goolsbee challenged the S&P rating and rationale behind it. "They are saying their political judgment is that over the next two years, they didn't see a political agreement. ... I don't think that the S&P's political judgment is right."

But the S&P's projection of gridlock got support this week when two polls showed that the nation is much closer to Obama's resistance to Ryan's plan than it is to Ryan.

A Washington Post-ABC News poll found 78 percent of Americans oppose cutting spending on Medicare to reduce the deficit, and 69 percent oppose cutting Medicaid. Obama's plan to raise taxes on couples earning $250,000 a year or more wins the support of 72 percent of voters.

A McClatchy-Marist poll found 2 in 3 Americans favoring raising taxes on those earning more than $250,000 but 4 in 5 voters opposing cutting Medicare or Medicaid.

Obama's position is in sync with three-fourths of the nation.

Why would he retreat from this unassailable high ground to seek a compromise with a hugely unpopular Republican proposal? Why not pound the Ryan Republicans remorselessly as defenders of the rich and slashers of the social safety net if America agrees with you?

Obama may have found an issue to save his presidency.

He is today upside-down in every national poll. Many more Americans disapprove of the job he is doing than approve. Why would a president who has lost the support of half his country surrender a strong position that three-fourths of his country agrees with?

Democratic allies on Capitol Hill would regard this as madness.

What of the Republicans who appear today to be on the wrong side of the deficit reduction debate? Will they look at these polls and say, "We must stop trying to reform Medicare and Medicaid and move closer to Obama and impose higher taxes on successful Americans"?

To ask the question is to answer it.

Should Republicans revert to their venerable role of pre-Reagan days – the tax collectors for the welfare state – what would be the argument left for the existence of the party?

Not only does S&P's grim assessment of the prospects for U.S. deficit reduction seem sound. News from across the pond points to a fast-approaching day of reckoning in the financial world.

European investors are now demanding and getting 22 percent interest on two-year Greek bonds. And with Greek debt at 150 percent of its gross domestic product – the same as Zimbabwe – the question is no longer whether Athens will default, but when, how and what will be the losses to European citizens, banks and governments who hold Greek paper.

Will Greece be the only domino to fall, or will Ireland and Portugal follow and the contagion spread across Europe and leap the Atlantic?

What makes this appear more imminent was the triumph this week of a Euro-skeptic and ethnonationalist party, the True Finns, which vaulted from five seats in the Helsinki Parliament to 38 and will almost surely be in the new government.

High on the True Finns' agenda: tougher terms for any bailout of Portugal and using Finland's EU veto to kill Angela Merkel's plan for a super-bailout fund after 2013. Like other northern Europeans and even Germans in Merkel's party, the stolid Finns are sick of subsidizing the self-indulgent deadbeats of Club Med.

And here is where the risk to Obama comes. Playing off Ryan may be smart short-term politics, but if the world financial system were to come crashing down – in part because of the absence of a U.S. deficit deal – no one would blame Paul Ryan.

The Herbert Hoover of that depression would be Barack Obama.

More Drivers Running Out Of Gas

CBS Pittsburgh

PITTSBURGH (KDKA) — With gas prices pushing $4 a gallon, a lot of people are trying to stretch their dollar at the gas pump, but some of them are trying to stretch it a little too far.

Since the beginning of March, AAA has seen an 18 percent increase in the number of roadside calls for people running out of gas.

“I never put a lot in because I can’t afford to fill it up,” Leo Greek, a stranded motorist, said.

He says he’s not even sure how much it would cost to fill up his truck these days because he hasn’t done it for a while. He gets only what he needs and today he underestimated.

Read Full Article

BP Agrees to Pay $1 Billion for Oil Spill Restoration

BP Plc (BP) agreed to pay $1 billion to restore areas damaged by its oil spill, which spewed 4.9 million barrels of crude into the Gulf of Mexico for three months last year.

The U.S. Justice Department, which helped negotiate the deal, called it a “first step toward fulfilling BP’s obligation” to repair damage to natural resources. The money will be used to replenish beaches, barrier islands and damaged wetlands and for efforts to conserve ocean habitats, the department said in a statement.

“We believe the early restoration projects to be funded through this agreement represent the best way forward in restoring the Gulf,” Lamar McKay, president of BP America Inc., said in a statement

The agreement doesn’t affect BP’s potential liability from the spill, the Justice Department said. The U.S. has said it will seek from the companies involved as much as $4,300 in civil penalties for each barrel spilled, in the case of negligence or willful misconduct.

The London-based oil company told a federal court in New Orleans the fine may be based instead on the number of days the well gushed. The Clean Water Act provides a fine of $32,500 for each day of a spill, a difference that would amount to billions of dollars for the company.

Justice Review

Justice Department officials also are considering whether to charge BP managers with manslaughter, according to people familiar with the matter who spoke last month on condition of anonymity because they weren’t authorized to discuss the case publicly. Authorities are investigating whether BP managers who worked both on the rig and onshore should be charged in connection with the workers’ deaths, the people said.

Distribution of the resource restoration money will be overseen by trustees from Alabama, Florida, Louisiana, Mississippi, Texas, the Interior Department and the National Oceanic and Atmospheric Administration, according to the statement. The group will begin working after a public comment period.

“This is a good step to address the damage caused by the BP oil spill and to begin restoration,” Senator Jay Rockefeller, a West Virginia Democrat and chairman of the Senate Commerce Committee, said in a statement.

The agreement will “jump-start restoration projects that will bring Gulf Coast marshes, wetlands and wildlife habitat back to health,” Interior Secretary Ken Salazar said in a statement.

The $1 billion comes from a $20 billion fund BP set up to pay for restoration and to compensate spill victims. The Gulf Coast Claims Facility, which is run by Washington attorney Kenneth Feinberg and draws from the account, has paid more than $3.9 billion to individuals and businesses hurt by the spill.

Federal Reserve Paying Banks Interest Rate That Is Eight Times Market Rate

It's probably not clear to most Americans how Fed Chairman Ben Bernanke has changed the rules of the game for the benefit of bankers since he has taken over as chairman. He calls these changes new Federal Reserve "tools".

One important example of Bernanke's new Federal Reserve "tools" is the paying of interest on deposits that banks leave with the Federal Reserve. It has resulted in over a trillion dollars accumulating at the Fed, as what is known as "excess reserves". The Fed is paying banks EIGHT times equivalent market rates when they keep the funds as excess reserves.

The money bankers deposit with the Fed is totally riskless and also does not require them to hold capital against the deposits. Prior to the Bernanke regime, interest was never paid on these deposits. Alan Greenspan never paid interest on deposits left at the Fed. Paul Volcker didn't. Arthur Burns didn't. In fact, no other Fed chairman in Fed history has done so. But because Bernanke is doing this, banks are racking up totally riskless earnings that no one else in America can get.

For example, Bank of America in its recent quarterly filing with the SEC reported that it earned $63 million dollars for the first quarter in this total riskless way. It's a total bizarre gift from the Fed to the banking sector.

Further, the rate paid by the Fed is more than eight times the rate on one-month T-bills. In other words, if B of A or any other American attempted to find equivalent safety in the marketplace, they would have to invest in one-month Treasury Bills which are paying 0.03%. At the same time, banks are earning 0.25%, if they just leave the money on deposit with Bernanke at the Fed.

If Bank of America placed the money they had with the Fed last quarter in one monthT-Bills, the interest they would have earned would been far under $30 million. (The exact amount would depend on the rate fluctuations in the market).

In total as of April 21, banks have sitting in the warm bosom of the Federal Reserve, as excess reserves, $1.474 trillion. Over a three month period, this means the Fed will be paying banks nearly $1 billion, if reserves stay at this level. If banks tried to get equivalent market rates that all other Americans and corporations get, for equivalent risk, the banks would be getting only $110 million. In other words, with this new "tool" of Bernanke's, he is gifting banks $890 million every three months. Or a total of $3.56 billion each year. It should be added that this $3.56 billion is money the Fed simply prints up, which has the potential to enter the system causing even more price inflation for the rest of us.

Although Bernanke would argue that the paying of interest on excess reserves is a necessary tool the Fed needs to conduct monetary policy, arguing against this point is the fact that no other Fed chairman has needed such a tool. And although, a point can be raised as to whether the Fed should be manipulating interest rates or money supply at all, the addition of this Bernanke tool suggests, if anything, more monetary volatility in the system. Since Bernanke has started paying interest on reserves and it has become clear the size of funds that have moved in this direction, he has started the process of testing even more new "tools" to control this paying of interest tool. This odd designing of new tools, when the old tools of monetary policy worked fine, suggest very odd behavior by the Fed chairman and could result in dramatic swings in the economy, if one of these tools has not been thought out properly and, thus, results in wild swings in money supply growth.

Charles Goyette: 'FED devaluated the dollar'