financial world is awash with a debate as to whether the Fed will engage in QE
3 in the future. To me this debate is pointless.
Fed HAS to engage in more QE 3 if it doesn’t want the entire market to
collapse. Given the breakdown in Europe, the IMPLOSION in the Middle East, and
the ongoing nuclear disaster in Japan, the removal of Fed liquidity would kick
off a MASSIVE systemic Crisis.
had a full-scale market breakdown when QE 1 ended and that was because of
Greece: a country with a GDP of $329 billion. Removing liquidity from the
markets when Japan, the fourth largest economy in the world (if you count
Europe as one economy), the largest Oil exporting region in the world (the
Middle East), and Spain and Portugal are all breaking down would lead to an
absolute market DISASTER.
The Fed will
not risk this. Besides it HAS to keep the liquidity going if it’s to continue
supporting the TBTF banks in the US. Remember, 99% of what the Fed’s done in
the last two years has been aimed at supporting the large, Too Big To Fail
(TBTF) Wall Street banks. The reasons for this are:
Fed is in fact CONTROLLED by these banks via the Primary Dealer network
leaders are all front-men for Wall Street
In order to
understand these, you need to know that the REAL power of the Fed lies in its
primary dealer network, NOT stooges like Ben Bernanke.
unfamiliar with the Primary Dealers, these are the 18 banks at the top of the
US private banking system. They’re in charge of handling US Treasury Debt
auctions and as such they have unprecedented access to US debt both in terms of
pricing and monetary control.
Paribas Securities Corp.
Fitzgerald & Co.
Global Markets Inc.
Suisse Securities (USA) LLC
Securities America Inc.
Bank Securities Inc.
Sachs & Co.
Securities (USA) Inc.
11. J. P.
Morgan Securities Inc.
& Company Inc.
Securities USA Inc.
Stanley & Co. Incorporated
Securities International Inc.
Of this group four banks in particular receive unprecedented
favoritism of the US Federal Reserve. They are:
that these are the firms deemed “Too Big To Fail.” The Fed not only insured
that they didn’t go under during 2008, but in fact allowed these firms to
INCREASE their control of the US financial system.
Consider that JP Morgan took over Bear Stears. Bank of America
took over CountryWide Financial and Merrill Lynch. Citibank and Bank of America
were the only two banks to have their liabilities directly backed by the Fed
($280 billion for Citi and $180 billion for BofA).
Then there’s Goldman Sachs which was made whole from all AIG
liabilities, received $13 billion in direct funding from the Fed, and was
supported while ALL of its investment bank competitors either went under or
were consumed by other entities, granting Goldman a virtual monopoly over the
investment banking business (the firms that were merged with larger firms all
laid off large portions of their employees and closed down whole segments of
My point with all of this is that we NEED to ignore what the Fed
says and instead focus on what it does. And in the last two years, the Fed has
done everything it can to support these four firms. Indeed QE’s 1, 2, and the
coming 3 are nothing but an attempt to funnel TRILLIONS into these firms (and the
other primary dealers).
The reasons the Fed is engaging in QE rather than simply dishing
out the funds are:
outrage would be EXTREME if the Fed just gave the money away
Fed needs to support those firms with the largest derivative exposure
The reason that the 2008 debacle happened was very simple. The
derivatives market, the largest, most leveraged market in the world.
Today, the notional value of the derivatives sitting on US banks’s
balance sheets is in the ballpark of $234 TRILLION. That's 16 times US GDP and more than four times WORLD GDP.
Of this $234 trillion, 95% is controlled by just four banks. Those four banks and their derivatives
exposure (in $ TRILLIONS) are charted below:
The above picture summates two things:
Who REALLY controls the US financial system
Why QE 3, 4, etc are guaranteed
The Fed HAS to continue pumping money into the system to support
these firms’ gargantuan derivative exposure. Failing to do so would mean a
disaster on the scale of four to five times that of 2008.
Remember 2008 was caused by the credit default swap market which
was $50-60 trillion in size. The interest-rate derivate market is $200+
TRILLION in size.
So I am certain QE 3 will be coming. If it doesn’t come in June
we’ll get hints of it until it’s finally announced. The Fed cannot and will not
stop the money printing. Bernanke will be forced to resign long before he takes
the paperweight off the print button.
So if you’re
not preparing for mega-inflation already, you need to start doing so NOW. The
Fed WILL continue to pump money into the system 24/7 and it’s going to result
in the death of the US Dollar.
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