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:
- 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.”
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.
We are in the latter stages of the debt death spiral where debt and interest payments can only be made by adding more debt. This process has a sure ending. Like the flush of a toilet, the spiral goes faster and faster until it finally ends. [Let me put forth just how serious the problem is.] Words: 431
At the risk of looking/sounding like some crazed religious fanatic usually seen carrying a sign or proclaiming: “Repent, the end is near,” I shall avoid the word “repent”. To me, the rest of that proclamation appears accurate and reasonable, at least with regard to our economic condition. [Let me explain:] Words: 1896
This short video – on the unsustainability of government spending – should be watched by everyone, including those not yet old enough to vote. It should be shown in every high school and college classroom. Anyone that cannot understand this presentation should not be allowed out without a guardian.
Our civilization would not be able to handle such a transition from an expansionary credit based economy where goods and services were readily available into a paradigm of credit contraction, supply shortages and destitution and this is what is coming. There is no way to prevent it – only to defer it until a later date – and that day will soon be upon us. Words: 590
The outcome of the election of 2012 will [only] determine the rate of speed at which we approach the [financial] cliff [because] neither political alternative is willing to change course, to steer away from the cliff. The cliff is so high that whether we go over it at 200 mph (Obama) or whether we merely slip over the edge (Romney), the end result is the same — fatal for the economy and perhaps our entire political system. It is the fall that will kill us. [This article explains why that is going to be the case.] Words: 1135
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
With the U.S. election just months off, political pressures will mount to favor fiscal stimulus measures instead of restraint. Such action can only accelerate higher domestic inflation and intensified dollar debasement culminating in a Great Collapse – a hyperinflationary great depression – by 2014. [Let me explain why that is the inevitable outcome.] Words: 2766
Whether our current economic crisis will end with massive inflation or in a deflationary spiral (ultimately, either one results in a Depression) is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family. [Here is my assessment of what the future outcome will likely be and why.] Words: 1441
Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, argues that the Fed’s policy of providing liquidity has “enormous potential to increase the money supply,” resulting in what The Wall Street Journal’s Real Time Economics blog calls “an inflation inferno.” [Personally,] I think it’s too soon to make significant changes to a portfolio based on inflation fears. Here’s why. Words: 550
The developed economies of the world have opened the money spigots…[and this] massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed. [Let me explain further.] Words: 625
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
Interest rates have been manipulated to keep them extremely low in an attempt to stimulate the economy but…unless deficits are dramatically reduced…. interest rates will eventually rise and government interest expense will double or triple from the amounts being paid today. That potentially triggers a debt death spiral, where government has to borrow more than otherwise expected. It also raises the credit risk and could ratchet interest rates up again. It has happened to Greece, Portugal, Spain and other European countries already this year and could well happen in the U.S. too. Words: 595
Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign. The question is: when is sooner or later? The purpose of this article is to examine that question. Words: 2600