By Graham Summers
During Round 1 of the Crisis, the US tried to combat the collapse of the private banking sector (especially the TBTFs) by shifting debt onto the public's balance sheet and printing money to buy Treasuries so we could maintain a massive deficit (north of $1 trillion).
Put another way, the powers that be attempted to solve a MASSIVE debt implosion by issuing more debt. Aside from the fact this is outright insane, the problem with this is that we're at a point of debt saturation in the system.
Kyle Bass of Hayman Advisors notes that from 1917 to 1952 each new Dollar of US debt brought on roughly $4 worth of GDP. From 2000-2010, you got seven cents of GDP growth for every $1 in new debt issued.
Put another way, each new $1 in debt issued today is producing less and less returns. By some estimates we've even reached the point at which new debt issuance is actually a net drag on the economy as interest payments eat into growth.
Ben Bernanke knows this, and has started to hint at it in his recent speeches and Q&A sessions with the public. Indeed, if you read between the lines of his statements starting in May, it's clear that he has realized he cannot solve the US's debt problems and that QE has failed.
Q. Since both housing and unemployment have not recovered sufficiently, why are you not instantly embarking on QE3? -- Michael A. Kamperman, Waco, Tex.
Mr. Bernanke: "Going forward, we'll have to continue to make judgments about whether additional steps are warranted, but as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate...
"The trade-offs are getting -- are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It's not clear that we can get substantial improvements in payrolls without some additional inflation risk. And in my view, if we're going to have success in creating a long-run, sustainable recovery with lots of job growth, we've got to keep inflation under control. So we've got to look at both of those -- both parts of the mandate as we -- as we choose policy"
http://economix.blogs.nytimes.com/2011/04/28/how-bernanke-answered-your-questions/
Pessimistic Bernanke Fed Admits QE Has Failed In FOMC Statement
In its latest FOMC statement, the Bernanke Fed has admitted the economy continues to remain depressed, essentially admitting that both programs of long-term asset purchases, or quantitative easing, have failed to prop up output after what has been the worst recession since the Great Depression.
"Monetary policy can do a lot, but monetary policy is not a panacea." -- Ben Bernanke 9/29/11
U.S. "close to faltering," Fed ready to act: Bernanke
Asked whether another round of bond purchases, known as quantitative easing, was in store, Bernanke was noncommittal.
"We never take anything off the table because we don't know where the economy is going to go. We have no immediate plans to do anything like that," he said.
http://www.reuters.com/article/2011/10/04/us-usa-fed-bernanke-idUSTRE79337C20111004
Central banks may need to burst bubbles: Bernanke
Federal Reserve Chairman Ben Bernanke said on Tuesday that central banks may need to resort to monetary policy to combat asset bubbles, although regulation should be a first line of defense.
http://www.reuters.com/article/2011/10/18/us-usa-fed-bernanke-idUSTRE79H5IR20111018
Look at the progression there. As far back as May 2011, Bernanke admitted the benefits of QE were less attractive. Now he's not only admitting that asset bubbles exist (something Greenspan never admitted) but that Central Banks may even need to "burst" them!?!?
In plain terms, the Fed will NOT be launching another round of QE or major policy changes until the next round of the Great Crisis hits in full force. And by that time it will be pointless anyway as once the defaults begin, the leverage in the global banking system will implode rapidly.
It is no longer a matter of "if" for defaults, it's a matter of "when." And we are going to be seeing defaults in the individual, corporate, banking, and sovereign space. This is going to be the Great Debt Reset: the time when the market calls out the global debt bubble and we enter a period of severe economic contraction accompanied by soaring interest rates.
The worst-case scenario is that everything comes to a head in the next six months. Remember, the slow motion train wreck that is Greece has been playing out since the end of 2009. The market is already pricing in a Greek default. And Germany has even alluded to the fact that it's preparing for a Greek default that will feature at least a 60% haircut. Heck, France has even announced plans to nationalize 2-3 banks "just in case."
What happened in 2008 was literally just the warm up. The REAL DEAL is coming in the next 14 months. And it's going to involve corporate, financial, and sovereign defaults.
This is coming. It's no longer a matter of if but when.
Comment:
I know Mr. Summers can be difficult to understand at times because he uses a lot of economic jargon, but you can still get the gist of what he's saying, and it isn't good.
However, one thing he said gives me hope. When he says Bernanke and the FED are powerless, he means that they could collapse and the United States would be without a Federal Reserve Bank. Now that would be terrible, wouldn't it?
Gee, without the FED, the government would have to print it's own money at less than a penny per bill, instead of ten times the rate the FED charges us. More than that. It costs the FED the exact same amount to print a one hundred dollar bill as it does to print a one dollar bill, yet they charge us higher fees, for greater denominations. That's usury, plain and simple.
Now don't get me wrong. I hate this filthy corrupt government that works for the wealthy elite, and not the people, but the government's purpose in taxing us is to fund itself, not make mega-profits like the FED. Yeah, I know, the government wastes billions every year, from wars to make the rich richer and defending Israel, to abuse of government expense accounts, but let's save government waste for another commentary.
Just imagine how much money the government could save if they printed their own money? If they did, it would be like getting it wholesale, without the FED's huge markup.
The FED also controls interest rates. THEY decide what they will be. Without them, it would be the government's decision.
It's a well-known fact that the lower the interest rates are, the more real estate is bought and sold. So why hasn't the FED lowered interest rates? If they did, more people would start buying houses, and maybe this economy could start to recover. After all, real estate is the heart of any nation's economy.
They reason they are keeping interest rates high is obvious. Profit for THEM and their fellow elites. When times are bad, like now, it is more profitable to let homeowners get foreclosed on. Foreclosures are sold at auction. I've seen documented cases of houses that are worth $200,000 selling for $500. You read that right - that's $500, not $5000, or $50,000. However, that is rare.
Typically, a $200,000 house usually auctions off for $50,000 - $100,000. But that's still a fantastic bargain. One hitch though. The sellers won't finance a foreclosed property. You either have to have the cash to pay in full, or arrange it with another lender who will pay the bank in full for you, and then you make payments to your lender. What's the difference? The difference is such a loan is a loan, NOT a mortgage. It is illegal to mortgage a foreclosed property. Personally, I don't know anyone who would lend me $100,000, or even $50,000 without collateral. If you have another property you can put up, that's fine. But how many working class people can afford two houses? Not many.
But if you're rich, then you've got it made. You have plenty of cash, so you can buy up all the foreclosures you want. Then, you rent them out, making the tenants pay through the nose for rent, and when the value eventually goes up, and sooner or later it will, you can flip it for a small fortune.
So at this time, having a lot of foreclosures is profitable. You can buy low, rent them out, then sell high later. See, when prices are high, it's more difficult to buy low. As a record number of people are losing their homes, record profits are being raked in - but not by us.
Comrades, this system is so screwed up, it can never be fixed. National Socialism is the ONLY hope the White working and Middle classes have for a prosperous future.
So what's it going to be? Are we going to return to the Serfdom of the Middle Ages, or are we going to take control of our own futures and break free from the Lord Of The Manor? It's up to all of us. If you won't take action, then nothing will ever change.
NOTE: Tomorrow is our California conference. I will post a report on it, however, I'm not sure when I'll be getting home, or how tired I'll be when I do. If I don't post tomorrow, then I will the day after.
Dan 88!
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