The US dollar is falling in value as its debts increase, expenditures increase, and the Federal Reserve so-called Quantitative Easing (QE) experiments only prove to further punish the survivors of the so-called World Financial Crisis/Credit Crunch with the inability to preserve and grow hard-won capital. The main cause of the dollars decline is the “blatant disrespect” of the natural inverse relationship between the value and the interest-rate of bonds—which is a debt issue—as all fiat bills are. Inflation began on 25 March 2009 when the US central bank decided to “buy” at least US $100B worth of Treasury bonds.

1. Report Completed: 31 August 2011
In the Name of Allah the Beneficent the Merciful
Topic: U.S. Banking Sector Report 2011
The US dollar is falling in value as its debts increase, expenditures increase, and the
Federal Reserve so-called Quantitative Easing (QE) experiments only prove to further punish the
survivors of the so-called World Financial Crisis/Credit Crunch with the inability to preserve and
grow hard-won capital. The main cause of the dollars decline is the “blatant disrespect” of the
natural inverse relationship between the value and the interest-rate of bonds—which is a debt
issue—as all fiat bills are. Inflation began on 25 March 2009 when the US central bank decided
to “buy” at least US $100B worth of Treasury bonds.
(http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm) As I warned in a
letter I wrote to Latin American governments and some Southern African governments, food
prices would rise on a global scale, and prices across the board will also rise due to inflationary
pressure. I had also wrote in that letter that this would be done in an incremental sequence in
order to give the impression that we were still in a deflationary period, although we were in the
beginning stages of a period of inflation. Evidence of this is in the R & A section of the company
website: http://www.mge19.com under the title “Warning to Latin American Governments”.
The “disrespect” as pointed out earlier is simply this:
Under normal circumstances,
When the value of the bond goes up; the interest rate falls.
When the value of the bond goes down; the interest rate rises.
All bonds are an issuance of debt. The fiat bill has no commodity-backed standard and is
supported by the economic activity of a nation which is rooted in debt. Hence, the fiat currency is
functionally an issuance of debt and operate from this inverse law of bonds.

2. Understanding this will help one to see why economic growth and activity in the US and globally
have been sluggish and overbearing. Once the US central bank implemented its “Quantitative
Easing” experiments—which is adding liquidity into the global markets by “purchasing Treasury
bonds”--it decided to lower interest rates via the infamous “Fed Fund rate”--the US key rate.
When there is more liquidity than what the economy demands, prices rise because the value of
the currency diminishes. If this is the case, then why would they lower the interest rate? This is
the disrespect of the inverse law of bonds that I spoke about.
The reason why economic activity has slowed in spite of rising prices is because if interest
rates are low and the value of the currency is diminishing, why would any right-thinking bank
distribute capital? They will receive back currency with diminishing value at virtually-free rates.
This will literally “break the banks”. Contrary to popular belief, banks are risk-adverse by
nature.
Most companies borrow from banks in order to retain their earnings and profits. If a
company were to use its earnings for investment in its own expansion, then their earnings and
profit margins would diminish because those profits and earnings would then be categorized as
“capital”. This would have a significant impact on stock prices. Most companies prefer to
borrow from banks in order to expand their business.
With prices increasing, economic growth has been taking place since 25 March 2009;
albeit at a slow pace. As I have warned before, if inflationary pressure is allowed to continue
unbridled, then costs will catch up with revenue-generation. This will slow down economic
growth significantly. This coupled with near-zero interest rates will bring economic growth to a
grinding halt. This explains why employment levels have not increased significantly. This also
explains why many companies and banks are still struggling.
Most banks make investments and distribute loans for revenue-generation and growth
purposes. With diminishing currency value and near-zero interest-rate levels, banks are
reluctant to distribute capital. In fact, due to the so-called Credit Crunch, most banks are cash-
strapped themselves—seeking to raise capital. The tough regulations now imposed on many
banks are punishing them for surviving the so-called World Financial Crisis with the little capital
they have left. This forces the banks to rely on their investments for growth. However, the new
regulations limits the level of risk they are able to take. This positions these banks to take on less
risk which means less prospects for growth. Growth levels for banks will be significantly
diminished. This will prove detrimental to banks—especially smaller retail and community
banks.
Companies who rely on banks for capital must look to other sources for capital. This
includes investment banks, private equity firms, and other investment companies. The scarcity
of capital (distribution) mixed with increasing cost-levels position many companies that lack
large liquid capital margins for buy-out status. This is evident in today's economy where bigger
banks and bigger companies are buying out many of their smaller counterparts.
Even with this level of corporate and banking consolidation, the
increasing inflationary pressure with the maintenance of near-zero interest-rate levels will bring
economic activity to a grinding halt. What does this mean? Since the fiat currency is supported
by the economic activity of a nation which is rooted in debt and is not backed by a monetized

3. commodity, if inflation is allowed to continue with interest rates near-zero, the US dollar will
collapse—as well as all currencies that are still directly pegged to the US dollar. This includes the
Chinese yuan and Japanese yin. It appears this may well be the case since it has been reported
that US central bank will maintain its near-zero interest rate level until FY2013. It has also been
reported that they may add more liquidity through its so-called Quantitative Easing experiments.
This will only prove to collapse the dollar further. (
http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm ) Considering that
interest rates will remain at its current status until FY2013 at the earliest, this will prove to be the
longest inflationary period in the history of the US. The day that the US central bank decides to
raise interest rates will be the day that they are planning to reverse inflation and implement
deflationary pressure—continuing to disrespect the inverse law of bonds. However, I serious
doubt this will occur. I believe the goal is to deliberately collapse world economies through their
currencies in order to justify implementing an artificially-imposed global currency in which the
IMF's Special Drawing Rights are the prototype of. That's another analysis however.
Regulations
The Supervisory Capitalization Assessment Program (better known as the stress tests) are
punishing banks that survived the so-called “Credit Crunch” with the little capital they were
able to retain by compelling them to raise capitalization (liquidity) levels while limiting risk
levels. This will significantly limit growth levels for banks—especially smaller independent
community banks. Currently, the US economy is experiencing intense inflationary pressure.
The value, or purchasing power, of the US dollar is diminishing significantly. This makes the
raising of liquidity levels of little consequence—especially with low interest rate levels and limited
growth opportunities. The low interest-rate levels are having an adverse effect on revenue-
generation. Banks are reluctant to distribute capital (loans) when the purchasing power of the
US is diminishing and interest rates are low. The banks will generate very little revenue under
these conditions. Considering that they will receive payments in currency that has diminishing
value, this may put banks in the red (negative fiscal position).
The other aspect of the stress tests is that banks are no longer able to invest more than 3%
of their capital with or in hedge funds and investment banks. Banks must follow the Volcker
Rule which is defined by Wikipedia as:
The Volcker Rule was first publicly endorsed by President Obama on January 21, 2010. The proposal
specifically prohibits a bank or institution that owns a bank from engaging in proprietary trading that
isn't at the behest of its clients, and from owning or investing in a hedge fund or private equity fund, as
well as limiting the liabilities that the largest banks could hold.

4. Of course amendments were put in place that allows investment in a hedge fund, but limit its
investment levels. This will make smaller banks ripe for a buy-out, takeover, merger, or
acquisition. These regulatory conditions—coupled with irregular monetary conditions—will
significantly diminish revenue-generation and capital growth levels. According to the Pillsbury
Law Firm (http://www.pillsburylaw.com/index.cfm?pageid=34&itemid=39752):
Hedge Funds and Private Equity Funds Restrictions
The Volcker Rule limits a covered banking entity's sponsorship of hedge funds and
private equity funds and limits aggregate investment in hedge funds and private equity
funds to no more than three percent of the covered banking entity's Tier 1 capital and
further limits investments in any such fund to not more than three percent of such fund.
“Sponsoring” a fund includes: serving as a general partner, managing member or trustee
of a fund; selecting or controlling (or having employees, officers, directors or agents who
constitute) a majority of the directors, trustees or management of a fund; or sharing a
name or variation of the same name with a fund. “Hedge fund” and “private equity fund”
are defined as any issuer that would be an investment company, as defined in the
Investment Company Act of 1940, but for Sections 3(c)(1) and 3(c)(7) of that act, or
“such similar funds” as the regulators may, by rule, determine. “Tier 1 capital” is the core
measure of a firm's financial strength from a regulatory perspective; it is composed of
core capital, which consists primarily of common stock and disclosed reserves or
retained earnings and may also include non-redeemable, non-cumulative preferred stock.
As stated before, this will make smaller bankers ripe for a buy-out, takeover, merger, or
acquisition by larger banking institutions because the regulatory environment coupled with
inflationary pressure and low interest rates will position these banks for reduced revenue-
generation levels and reduced capital growth. The number of smaller independent banks in the
United States is expected to be reduced significantly by the year 2013. Many of these banks are
expected to be absorbed by the larger banking institutions or shut down by self-regulatory
organizations due to inadequate capitalization levels.
The Demise of the Hedge Fund
Many hedge funds are taking advantage of a particular loophole in the Dodd Franks Act
that requires advisers with less than USD $150 million in assets under management that operate
as a “family office” are exempt of the regulations in Title IV of the Dodd Franks Act—which is
also known as the Private Fund Investment Advisers Registration Act of 2010. This will induce
fund managers/advisers to buyback shares from external investors and manage their personal
holdings. Title IV of the Dodd Frank Act imposes an extensive increase in reporting
requirements to federal agencies and regulators than before. We believe this will significantly
reduce the number of hedge funds and private equity firms while simultaneously increasing the
number of “family offices” in the US.

5. Conclusion
We expect a significant level of absorption and reduction of smaller independent banking
institutions—reducing the number of banks in the US by at least 30% by the year 2013. We also
expect a significant reduction of investment firms such as hedge funds, private equity firms, etc.
This will lead to a major consolidation of the banking industry in the US. Only the major bank
holding companies such as J.P. Morgan-Chase, Bank of America, Wells-Fargo, etc appear to be in
a position of significant growth levels in the long-term. Even with this, some of these major bank
holding companies may form mergers. This may run into some anti-trust issues, but as
demonstrated with the TARP program, anything is possible with these banks. What we are
witnessing is the consolidation of the financial markets and banking sector in the US—shutting
out smaller investors while leaving these investors with fewer alternatives in the US. This will
lead to an explosive level of capital flight from the US markets into emerging markets, or less
developed markets such as that in the African Union, Asia, and Latin America. We would
recommend that investors begin to invest in developing African and Latin American banking
sectors to optimize growth. The entrepreneurial spirit combined with the stabilizing economic
environment in these areas will increase capital inflows and cash flow for banks. Also banking
professionals from the Diaspora with knowledge of the local areas in these emerging markets and
banking management expertise will position African and Latin American banks for significant
growth. The increased capital inflows into the African continent—especially sub-Saharan Africa
—demonstrates the potential that African economies have. Unfortunately, it appears the US
banking sector is becoming a consolidated behemoth that is decisively shutting out investors and
leaving them with fewer domestic alternatives.
MGE19 Economic Research and Structural Models is an economic research firm based in the
United States that specializes in Predictive Market Analysis (PMA) and economic structural models
designed to create economic stability on a permanent basis and perpetual economic growth through
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