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By threatening to drop money out of helicopters to fight deflation – to leave a
paperweight on the “print” button if you will – Bernanke convinced the market and all of Wall Street that the Fed would always be there to step in and save the day. [In fact, however,] the whole thing was a bluff meant to prop up the markets – the famed Bernanke Put – and it was a lie. The markets will be realizing this in the coming months, if not sooner, and when they do, we’ll see the REAL Collapse: the one to which 2008 was just a warm-up. [Let me explain.] Words: 444
So says Graham Summers (www.gainspainscapital.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Summers goes on to say:
[Were the Fed to do just that, however,] to hit “print” and prints TRILLIONS of dollars to monetize everything under the sun, [there would be major ramifications, as follows:]- The bond market [would] implode taking down the US financial system with it (85% of the $224 trillion in derivatives sitting on US bank balance sheets are related to interest rates).
- There would be a loss of faith in the underlying currency, which causes hyperinflation (this is exactly what happened in Weimar). Most people forget that hyperinflation is the SAME as defaulting: in both situations the underlying currency becomes worth much less if not worthless.
So printing is ultimately a useless concept.
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What about debt monetization? Couldn’t the Fed just print tons of money to buy Treasuries and other debt instruments? The answer here is ALSO a resounding “NO” for the following 3 reasons:
- Inflation
- Political consequences
- Draining Treasuries from the banks
The last time the Fed instigated QE, food prices went through the roof resulting in riots and civil unrest around the globe. Today, food prices are already soaring due to severe droughts. The Fed’s hands are tied here.
If the Fed engages in QE, the political consequences would be severe. QE 2 alone made the Fed front page news in a BAD way, resulting in the Fed going into major damage control mode: op-eds about Bernanke being a regular guy, town hall meetings, etc.
Finally, one has [to wonder if] the Fed really want to be draining Treasuries and Agencies from the banks’ balance sheets. Why? Because the big banks, which sit on over $200 TRILLION worth of derivative trades, only have $7.12 trillion in assets and if the Fed were to engage in QE it would suck some of these assets out of the banking system resulting in the banks being even more leveraged and susceptible to collapse – and Bernanke knows this. He even admitted it recently, saying, “If the Fed owned too much TSYs and Agencies it would hurt the market.”
Conclusion
The Bernanke Put is a lie. The markets will be realizing this in the coming months if not sooner. When they do, we’ll see the REAL Collapse: the one to which 2008 was just a warm-up.
*http://gainspainscapital.com/?p=2083 (To access the above article please copy the URL and paste it into your browser.)
Editor’s Note: The above posts may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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