Friday, July 15, 2011

Why Bernanke And Pals Will Soon Need a New Pair of Pants

by Graham Summers

The Fed must literally be about to pee itself.

The $600 billion in QE 2 bought at best roughly three months’ worth of improved economic data. Granted, it was heavily massaged economic data (US economic data is now largely a work of fiction), but for simplicity’s sake, we’ll say that the Fed got roughly one month’s worth of improved economic data for every $200 billion it spent.
However, QE 2 ALSO blew up food and energy prices up: between 2010 and 2011 gas rose 33% while ground beef, cheese, and vegetables were all up in the double digits as well.

So the Fed needed things to cool down a bit. So they allowed QE 2 to end. Of course, Bernanke juiced the market one final time to the tune of $76 billion, probably hoping that the market would buy his bluff and believe that things might hold up without Fed juice.

But the market didn’t. Instead, the markets have begun to implode proving beyond any doubt that the Fed was the primary support behind the stock market rally.

So here we are today. The US economy has very clearly fallen off a cliff. The Fed already has a $2.8 trillion balance sheet (larger than the GDP of France, the UK or Brazil). Announcing QE 3 would mean creating an inflationary disaster. And NOT announcing QE 3 means a market collapse and very likely another 2008 scenario.

So it’s literally “pick your monetary poison.”

However, in the end, regardless of how we get there, QE 3 will come. The reason for this is that EVERY 
Fed move since the Financial Crisis began has been aimed at propping up the large Wall Street banks who continue to remain insolvent due to their TRILLIONS in derivative exposure.

When it comes between screwing the taxpayer vs. triggering a systemic implosion that will destroy the banking oligarchs, the Fed has taken option #1 EVERY TIME. They’ve already done it to the tune of $4 trillion (at the bare minimum). They’ll do it again.
Why?

Because letting the banks collapse means hitting “reset” on the entire financial system (at least temporarily). 

Wall Street as at minimum over $200 TRILLION in derivatives sitting on its balance sheets. And the Fed will do anything it can to try and contain this disaster. That includes kicking the US Dollar off a cliff and screwing US consumers.

Ultimately, all of these efforts will fail (see the Euro situation today). But this will only happen after the Fed has done any and every action it can to prop things up. This will include QE 3 and as many QE’s as the US Dollar will allow.

So, QE 3 is coming. We might even see QE 4 before the system collapses. But the system WILL collapse. And when it does, it will be a 2008 type Crisis on steroids.

The reason for this is that the Financial System is now even more leveraged than it was during the Tech Bubble. When the Crisis hits all the over-leveraged players (read: EVERYONE) will have to sell positions to meet margin/ redemption calls.

This will kick off a death spiral in the markets as every drop results in more and more selling from financial institutions. Add to this the collapse of the Euro, a China hard landing, and US debt default and you’ve got the makings of a global catastrophe: think what’s happening in Greece with now on top of a stock and bond market crash.

What will follow will be the equivalent of 2008 all over again, along with food shortages, civil unrest, outbreaks in crime, bank holidays, and the like. It will, in short, be like what’s going on in the Middle East today (though NATO won’t be bombing us).

Which is why if you haven’t already taken steps to prepare yourself and your portfolio for the coming disaster, you need to do so NOW.

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