This page has been archived and commenting is disabled.
Why QE 3 is Guaranteed (the Alternative is Something Four Times Bigger than 2008)
- AIG
- American International Group
- Bank of America
- Bank of America
- Barclays
- Ben Bernanke
- Ben Bernanke
- Capital Markets
- Citibank
- Citigroup
- Countrywide
- Credit Suisse
- default
- Deutsche Bank
- ETC
- Fail
- Federal Reserve
- goldman sachs
- Goldman Sachs
- Greece
- Gross Domestic Product
- Japan
- Merrill
- Merrill Lynch
- Middle East
- Morgan Stanley
- Nomura
- notional value
- Portugal
- RBC Capital Markets
- RBS
- Too Big To Fail
The
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.
Indeed, the
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.
Remember, we
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:
1) The
Fed is in fact CONTROLLED by these banks via the Primary Dealer network
2) Fed
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.
If you’re
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.
The Primary
Dealers are:
1. Bank
of America
2. Barclays
Capital Inc.
3. BNP
Paribas Securities Corp.
4. Cantor
Fitzgerald & Co.
5. Citigroup
Global Markets Inc.
6. Credit
Suisse Securities (USA) LLC
7. Daiwa
Securities America Inc.
8. Deutsche
Bank Securities Inc.
9. Goldman,
Sachs & Co.
10. HSBC
Securities (USA) Inc.
11. J. P.
Morgan Securities Inc.
12. Jefferies
& Company Inc.
13. Mizuho
Securities USA Inc.
14. Morgan
Stanley & Co. Incorporated
15. Nomura
Securities International Inc.
16. RBC
Capital Markets
17. RBS
Securities Inc.
18. UBS
Securities LLC.
Of this group four banks in particular receive unprecedented
favoritism of the US Federal Reserve. They are:
1. JP
Morgan
2. Bank
of America
3. Citibank
4. Goldman
Sachs
You’ll note
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
their business).
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:
1. Political
outrage would be EXTREME if the Fed just gave the money away
2. The
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:
1)
Who REALLY controls the US financial system
2)
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.
If you’ve
yet to take steps to prepare your portfolio for the coming inflationary
disaster, our FREE Special Report, The
Inflationary Disaster explains not only why inflation is here now, why the
Fed is powerless to stop it, and three investments that absolutely EXPLODE as a
result of this.
All in all
its 14 pages contain a literal treasure trove of information on how to take
steps to prepare AND profit from what’s to come. And it’s all 100% FREE.
To pick up
your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.
Good
Investing!
Graham
Summers
- advertisements -
Are you new here...I mean, to this planet?
The alternative to continued monetization is to hope that there will be sufficient buyers of new Treasuries come July. 70%+ of the new (and growing) deficit spending by the U.S. has been monetized by the Fed. Now we need to attract $100B per month to soak up increasingly risky U.S. debt? And with Japan on the DL?
The Fed is on it's last legs here, but not monetizing means a definitive rise in yields to attract buyers. Every 50 bps on the $14.5T debt is $72B added to the deficit. So the hole would get bigger, faster without QE. Or we simply default, which Benny and the Banksters won't allow (on their watch) no matter what.
The game is over, but preservation instincts will always lead one to defer the inevitable. With QE, it's a more gradual collapse of the dollar; wihtou it, risks immediate default or crushing increase in debt service.
The dollar is like the Fukishima 50. No chance for resuscitation.
You're entitled to your opinion, but there are other possibilities. Who will buy treasuries? Scared and desperate money, that's who, just as in 2008. IIRC the yields on short term even went negative in those dark days as everyone ran for cover. But that's not the narrative PM jockeys want to hear, so I guess it could never happen.
If you think you can maintan reserve currency status (maybe you just assume it cause lineally(?) that's all you know) than you don't have to worry about the USD, certainly its loss of value over the last 100years would indicate they aren't worried.
The value of the USD, vs. other fiat currencies, or vs. gold ?
Banks in Europe are reportedly more leveraged than those in the US. So it’s conceivable that in the next crisis fiat money flow will converge on the USD, what Max Keiser describes as “the leper with the most fingers.”
As for the ex-fiat alternative of gold, recall that in Fall 2008 it went down and the USD went up. And people like Prechter argue that a collapse of the x100T derivatives market would have a deflationary impact far exceeding the inflationary factors.
So it doesn’t seem clear whether we’re driving off a cliff, or falling into a volcano. Not much difference in the end.
I think this gets back to that 'Biflation' explanation - massive inflation in day to day stuff like food, massive deflation in large, nominal and/or ethereal assets like real estate, stocks and financial products
Yeah i just reckon the collapse of the USD is not something they put too much time into worrying about.
because the central bank is not functioning as a central bank. its not acting in the interests of the american currency. you can bet all the primary dealers are getting in the lifeboats in assets outside the $US
I bet you 200 Trillion bucks some of them are squirrelling away gold.
that's only, like, 2 or 3 oz of gold by the end of the year
JPM sucked up Washinton Mutual, too. Bernanke is the madman driving the car straight towards the abyss. Treasonous, they way they turned capitalism against the populace.
There is not enough demand for UST's to refinance maturities and the massive Federal deficit; not even close. Higher rates will blow the doors off the financial markets. The PD's control the Fed.
There will be no end to the reckless expansion of the Fed B/S or the monetary base. About this Phoenix "buy my frigging report already" Capital is correct, IMO. I don't understand the ZH case at all. I'd like to...
Why will there be a derivatives melt-down at the big four just because QE stops? That is a leap of faith in the writer's thesis? If there is some reason why the writer feels there will be a contagion in dervitiave at least fucking lay it out. Jeesh.
Because the entire construct was built on an exponential growth construct using borrowed money. All leverage requires underlying growth in the economy, whatever the economy is, to pay the rent on the borrowed money, even if the money's created from thin air and loaned as if it was real. Without real growth, and given the degree of leverage used to build a multi-trillion casino game, the supply of fiat money is all that's left to grow. Without exponential nearly-free energy production growth, there's no possibilty of economic growth in an economy based upon exponential nearly-free energy production growth. So, we're all fucked. Or, that's my impression of it anyway.
Because the entire construct was built on an exponential growth construct using borrowed money.
Wait, though. When QE1 ended there was no derivative explosion.
All leverage requires underlying growth in the economy, whatever the economy is, to pay the rent on the borrowed money, even if the money's created from thin air and loaned as if it was real.
I see what you're saying. Since a derivative is a "contract" between two or more parties and 20 trillion blow up there's a problem....but how is it possible 200 trillion in derivates are outstanding between four banks...I mean, so what, 2 fail at the end of the day and 2 survive, right? A zero sum game. The other two can just be sent into recievership where they belong anyway....no?
Wait, though. When QE1 ended there was no derivative explosion.
Go back and check the dates. QE1 became QE1.5 in August, Became QE2.0 in November. Nothing ended.
great summary. But I'd still ike someone to spell out the mechanics of how it would go down.
given tha tthe majority of the markets value is faith based, we can keep bullshitting ourselves to infinity that shit is worth more than is reasonbly should be priced at. what's the trigger points by which the TBTF's defect from the bullshitting? obviously it would be a self defence / 1st to stop bullshitting loses the least / music stops find a chair kinda thing, but if QE stops are there hard and fast undeniable mechanics compelling the primary dealers to turn on each other ?
The banking system operates on leverage, at the margin like every other borrower -only they operate on 5% down or there abouts so the banks a systemically incapable of dealing with a decline in their assets/income from their assets. Its just like the home owner with next to no deposit hoping the market will go the right way, except they also releveraged derivatives on top of their home price as well which makes for great bonuses when you get it right - bid up the underlying against your mate and borrow out the difference (the instruments being fundamentally unrealisable).
The banks owe the derivatives to each other and count them in their assets, if one goes they all go.
Unfortunately our current monetary system requires the banks as the nexus of our economy (there being 3 parties to every transaction - buyer, seller, banker who owns the money used by the buyer and owes the money back to the seller once deposited [hence both debtor and creditor to the transaction]).
So the system as we know it can't handle a banking collapse and the banks can't handle deflation - hell of a bind eh!
yupyupyup i get all that, but why is it considered a fait acompli that the removal of QE will cause a downgrade in the prices of derivatives? Why would they not just maintain price or even be bluffed higher on vapour/propaganda - given the 'mark to fantasy' accounting rules
is it because of continued high mortgage delinquencies? wasnt that already priced in ?
Reggie middleton talked about these a year or more ago, the derivatives are so large they simply can't be realised, so when a shock comes someone won't be able to pony up for one which will mean the owner won't be able to pay the next guy on another one etc etc etc. Its 4 banks who have bid up their own derivatives books on various rate assumptions just like AIG & subprime.
But as reggie said at the time, no-one really knows what these der ivatives are as they aren't fully disclosed so its a guess as to how they are structured.
Smartest guys in the room...?
kudos for staying on topic, dude, thx
The removal of QE will cause a collapse in the financial sector - the banks being both the issuers and counterparties to most of this der ivative mess will mean the 4 way circle jerk in der ivatives will collapse.
If not that way then by the bond prices dropping, if these derivatives are interest rate based i'd bet my arse they are based around the yields we have experienced over the last couple of years and can't handle a sudden jolt - even if they are hedged it would only take one counterparty failure to collapse the rest.
The situation isn't really a fait accompli (no-one knows which way these things are placed) but 'more likely than not' i'd guess.
The QE3 or not QE3 debate is pointless. We are all in a car hurtling toward the edge of the cliff driven by madmen ( plural). We will all go over the edge because we're too stupid to simply reach for the ignition key and turn off the damn car. These people are losers and they know it - but they think they can get away with what they are doing because they always have. If they can't have their lives of extraordinary privilege then they will attempt to take everything down with them - no sense letting the peasants live their simple primitive happy lives if the powerful and privileged can't have theirs, their way, all the time. And all this focus on single personalities is maddening. Does anyone really think that the sock puppets like Bernanke, Obama, Geithner - the list is endless - have any control over what is going on? The list of the primary dealers is invaluable. They are the ones driving this car toward the cliff. What they won't do for just one more sunrise in the Hamptons. Meaningless, pointless lives - every one of them. Buy physical silver and gold, take possession, and keep buying it until these "primary dealers" finally lose control - that is the only way to turn off the ignition switch. This is the only power we the people have left to us. That is the nightmare that haunts these "primary dealers", but they are confident that not enough people will realize soon enough what is happening and what they can do about it. They are certain that enough of us are that stupid - in fact, they are betting everything they have on it.
You are right on target. Thanks for that analysis. The banksters, Federal Reserve money cartel and cronies in Washington DC beltway win again, with a stacked deck, and are in POWER.
Read www.ObamaDollar.com
We might get a cheaper price to buy in over the short term. Charles Nenner see's a medium term top in gold/silver
http://goldandsilverlinings.com/?p=739
Nenner is calling for a Treasury bond rally and plunge in interest rates following QE2.
So the most significant buyer of late, the Fed stops buying Treasuries and that causes Treasuries to rise? Fewer bids/bidders causes the price to increase??
I mean, the original purpose in starting QE was to hold rates down. Now ending QE will hold rates down?
I don't think so. Let's see what happens.
Oh, is it that easy? And how do we do that, exactly ...?
ML - read the post again.
It's interesting what you manage to avoid seeing.
it doesnt have anything to do with the ignition key...hilary clintnn has her welcome mat stuck under the accelerator pedal.....this toyota is already off the cliff...we just dont know it yet.
Over aready or ten feet backing and doing 90mph it's all the same. The law of physics make it a done deal. BUT it's a long drop and there are a lot of choices yet to be made about the course down and what type of landing happens; hard, harder, or really really hard.
+1 Well Said Sir!
Res publica mortuus est, vivat imperium
MF Global is also a primary dealer -- their ceo Jon Corzine (former Goldman Sachs ceo, NJ Gov, & Senator) became MF CEO about a year ago and got them in as a primary dealer....
There are 20 primary dealers in total, list is here:
http://newyorkfed.org/markets/pridealers_current.html
Actually, I think he's right, but it is really a crapshoot at this point, and it will be a simple thing to detect: QE or not QE, that is the question. Either Ben does it, or he does not. The other big question which is lurking is whether or not US treasury sales can occur at the the current rate without monetization. I think that is a real question too, but the most likely answer is no, it cannot.
Ben will be forced to QE for one of these reasons. He may requested to QE after the market reaction to an initial attempt at not engaging in QE 3 results in a crash. But the next time, QE3, will be full-blast trouble, inflation will rage as dollars are devaluated, and off we will go.
But first before QE3 (I bet it is under a new name) the Fed will create uncertainty and volatility in the markets so all those primary dealers can make some trading profits! Not to mention buy on the dips, then SUPER BUBBLE!
curious to see the exposure on those derivs...options, CDS, timing etc. If the market is unregulated, where do these figures come from.
I agree.
There is no alternative since the US is world's largest economy and $ is the reserve currency and the US has the largest military (by a factor of 10)..don F... with the guy with the biggest guns. The US can run $2 to $3 trillion annual deficits for years and keep interest rates at near zero and the rest of the world will go to Hell. The guy with the biggest guns makes the rules.
Yes ... unfortunately so.
It may explain why there is absolutely no attempt to actually fix anything.
Good to see the odd person realizes this whole game is backed by military might. QEn ends when they can't get their hands on new weapons. That's a ways off still.
ben will do QE3 and 4 and 5 and 6 for as long as he can because he has to.....half the worlds expenses are paid every day in QE printed money...debt spiral anyone...?
Funny last night you were bearish. Flip flop posters need not post
How novel, a useless troll here to discredit a decent article.
Personally I believe it is easy to be bearish on the economy and earnings (which we now know have nothing to do with the state controlled stock prices), while understanding that the four TBTFs have innovated our Ponzi growth paradigm past the point where they can get rid of all of the derivatives and just accept risk ... and hence derisk the entire system. They have their collective fingers on a global nuke deadman's switch.
The only fix is to dismantle them peicemeal, unwind the derivatices and take them down bits at a time... but many rich people would become poor and we cannot have that now can we?
Worldwide exposure to toxic derivative obligations are clearly in the triple digit trillions. And a key question is how long it will take for the banksters and Fed to unwind this toxic waste. Eventually it will be apparent that hyper-inflation is the only solution. But not before they load up on commodity derivatives and also hard assets. Well, it's already happening, isn't it? Gold and silver way up - they are still cheap in view of what we will see long term.
Ironic that the Japanese and world have in addition radioactive toxic waste that is still unquantified that will need lots of time to dissipate. Hmm, is God trying to signal us? I dunno, He sure acts in mysterious ways.
Also, who's to say that the banksters future gambles won't turn on them too?
See this one done a couple of years ago, and still on target
www.ObamaDollar.com Note that their research shows derivative exposure at $516 trillion and cites their reference, versus only the USA number of 234 trillion noted by Phoenix Capital Research (Phoenix did not cite their source reference).
So it is worse, sheople! Meanwhile Americans continue to feed on their corn derived diet, fattening up like wasteland cattle headed for slaughter. A good documentary to watch is Food Inc. It's about 90 minutes. I implore you to watch the free trailer on the front page on their website - make sure your volume is turned up - link : http://www.foodincmovie.com/ . Enjoy your highly-concentrated corn syrup laden foods and other toxics while your waistline is in constant battle to stay in your current pants.
Keep the 'working class' public peasants fat and dumb. And to add insult to injury, keep them taxed and polarized with a two party system that is in essence the same. While the financial elitists are at it, make sure to manage ownership of the media to keep the process fine tuned.
America is a plutocracy. If you don't know what that is, here's a link to make it real easy: http://en.wikipedia.org/wiki/Plutocracy
Already seeing some early signs that they will try and control our internet freedom too. Big brother is alive and well. How will you react when they try and go after websites like ZeroHedge? But that is a long time away. You see, this website will report the truth. And they don't want that. Governments lie. Like the myth of continual 2% inflation. Bah Bah go the sheep.
Ah ha, getting the picture now?
*Junk* for not being specific. Is this what you are talking about?