The Fed is Approaching the End Game... Are You Ready?

July 11, 2011

The financial world seems to think that because Greece accepted another bailout we'll be off to the races in the markets.

Aside from how absolutely moronic this view is (how'd the first Greek bailout work out? And it was what 12 months ago?), we have to consider the backdrop against which this particular tragic-comedy is playing out.

The consensus view from the mainstream financial media and 99% of find managers is that liquidity and access to loose money from central banks will keep things afloat.

However, reality shows this not to be the case... at all. Consider for instance the impact of the Fed's money pumps.

For starters, as a back of the envelope analysis, consider that in 2007 when the credit markets first jammed up, the Fed resorted to providing emergency money pumps of $30 billion or so.

By June 2008, the Fed had done this 14 times to the tune of $200+ billion. Then came the $700 billion bailout in November 2008.

So by the end of 2008, the Fed had put in nearly $1 trillion in capital to the markets. And this did absolutely nothing to avert the market collapse.

Then came QE 1, which put another $1.25 trillion into the markets. And even after QE 1 ended the Fed continued supplying the juice to the tune of $30 billion or so per month during options expiration weeks.

The central banks of the world are in a competition to devalue their respective currencies against each other. They will work together to suppress a particular currency if a carry-trade gets too out of control (see Japan earlier this year), but in general the ECB wants a cheap Euro, the Fed wants a cheap Dollar and so on and so forth.

These guys know that the financial system is broken. They've known it for over a decade (Greenspan even admitted that derivatives could "implode" the market in 1999). But they're going to kick the paper money can down the road as long as they can... primarily because the entire financial system is banking on their ability to "fix" things.

The 2008 Crisis was the first taste of systemic risk. The central banks threw everything including the kitchen sink at the problem in an attempt to hold things up. And it's worked temporarily in the sense that the financial world still believes central banks can handle the situation.

However, the fact remains that the central banks actually didn't fix anything. After all, you can only fix a debt problem by paying the debt off or defaulting. Moving it around and issuing more debt to meet current payments does nothing.

In this sense, the world's central banks literally "bet the farm" on themselves and the view that sovereign balance sheets can stomach this toxic waste. As we're now discovering in Europe, the laws of the markets (over-saturation of debt, default and the like) apply to countries as well as private banks.

The central banks know this and are now acting accordingly. It is not coincidence that they became net buyers of Gold within two years of the 2008 Crisis. Nor is it coincidence that they are now loading up on Gold at the fastest pace in over a decade. They KNOW (not think) that systemic risk is still on the table in a big way and that they will be POWERLESS to address the next crisis when it explodes.

Comment:

Well comrades, just three weeks until the default deadline. As you can see, things are NOT improving, but continue to deteriorate. I've even heard unconfirmed talk about Social Security being cut off, as well as unemployment and disability.

Now this doesn't directly concern me, but my folks are on Social Security. I can barely afford to take care of myself, let alone my parents. How many of us are either on Social Security, disability, or unemployment, or have family who are?

How many of us cannot afford to take care of our folks if Social Security is cut off? We're talking millions of people here, not just an unfortunate few. The riots in Greece may be here in this country in just a few weeks. It probably won't come to that, at least not so soon, but we should all be prepared, just in case.

"Hope for the best, but prepare for the worst." - Benjamin Franklin.

Dan 88!