Systemic Risk: Why This Time IS Different and the Central Banks Won't Be Able to Stop the Crisis

Phoenix Capital Research's picture


Europe will collapse before the end of the year and very likely before the end of the summer. When this Crisis hits it will be worse than 2008. And the world Central Banks will not be able to control the damage.

What makes this time different?


Several items:


  1. The Crisis coming from Europe will be far, far larger in scope than anything the Fed has dealt with before.
  2. The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this is an election year).
  3. The Fed’s resources are spent to the point that the only thing the Fed could do would be to announce an ENORMOUS monetary program which would cause a Crisis in of itself.


Let me walk through each of these one at a time.


Regarding #1, we have several facts that we need to remember. They are:


  1. According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans… the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.


  1. The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).


  1. The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).


  1. Over a quarter of the ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)


So we’re talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.


And all of this is occurring in a region of 17 different countries none of which have a great history of getting along… at a time when old political tensions are rapidly heating up.


As bad as the above points may be, they don’t even come close to describing the REAL situation in Europe. Case in point, regarding leverage levels, PIMCO’s Co-CIO Mohammad El-Erian (one of the most connected insiders in the financial elite) recently noted that French banks (not Greece or Spain) currently have 1-1.5% capital relative to their assets, putting them at leverage levels of nearly 100-to-1.


And that’s France we’re talking about: one of the alleged key backstops for the EU as a whole.


To be clear, the Fed, indeed, Global Central Banks in general, have never had to deal with a problem the size of the coming EU’s Banking Crisis. There are already signs that bank runs are in progress in the PIIGS and now spreading to France (see El-Erian’s comments in the article above).


I want to stress all of these facts because I am often labeled as being just “doom and gloom” all the time. But I am not in fact doom and gloom. I am a realist. And EU is a colossal mess beyond the scope of anyone’s imagination. The World’s Central Banks cannot possibly hope to contain it. They literally have one of two choices:


  1. Monetize everything (hyperinflation)
  2. Allow the defaults and collapse to happen (mega-deflation)


If they opt for #1, Germany will leave the Euro. End of story. So even the initial impact of a massive coordinated effort to monetize debt would be rendered moot as the Euro currency would enter a free-fall, forcing the US dollar sharply higher which in turn would trigger a 2008 type event at the minimum.


Moreover, we need to consider that the Fed is now so politically toxic that Ben Bernanke is literally going on the campaign trail to attempt to convince the American people that the Fed is an honest and helpful organization. Put another way, there is NO CHANCE the Fed can announce a large-scale monetary policy unless a massive Crisis hits and stocks fall at least 15%.


Finally, regarding my third point… if the Fed were to announce a new policy it would have to be MASSIVE, as in more than $2 trillion in scope. Remember, the $600 billion spent during QE 2 barely bought three months of improved economic data in the US and that was a pre-emptive move by the Fed (the system wasn’t collapsing at the time).


So given that the Fed will only be able to announce a large scale program in reaction to a Crisis, whatever it did announce would have to be ENORMOUS, a kind of shock and awe, attempt to rein in the markets.


Moreover, it would literally be THE LAST QE the Fed could hope to ever announce as political outrage from the ensuing Dollar collapse and inflationary pressures would likely see the open riots and/or the Fed dismantled (this has happened twice before in the US’s history).


In simple terms, the Fed’s hands are tied until a huge Crisis hits. And then, if the Fed acts it’s going to have to go “all in” with a massive program. If it does, we will still experience a Crisis, as the Dollar would collapse pushing inflation through the roof as well as interest rates (which in turn would destroy the banks as well as the US economy).


In simple terms, this time around, when Europe goes down (and it will) it’s going to be bigger than anything we’ve seen in our lifetimes. And this time around, the world Central Banks are already leveraged to the hilt having spent virtually all of their dry powder propping up the markets for the last four years.


Again, this time it is different. I realize most people believe the Fed can just hit “print” and solve everything, but they’re wrong. The last time the Fed hit “print” food prices hit records and revolutions began spreading in emerging markets. If the Fed does it again, especially in a more aggressive manner as it would have to, we would indeed enter a dark period in the world and the capital markets.




European Union

$16 trillion

United States of America

$14.5 trillion


$5.8 trillion


$5.4 trillion

European Central Bank

$3.8 trillion


$3.2 trillion

US Federal Reserve

$2.8 trillion


$2.5 trillion

United Kingdom

$2.2 trillion


Banking System

Total Assets

Total Assets Relative to GDP

Total Assets Relative to Central Bank Balance Sheet


$46 trillion




$12 trillion




This is not Doom and Gloom, this is reality.


On that note, if you’re not preparing for the collapsing of the EU, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.


This report is 100% FREE. You can pick up a copy today at:


Best Regards,


Graham Summers


PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.


And ALL of this is available for FREE under the OUR FREE REPORTS tab at:







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Thunder_Downunder's picture

Hold up...


The golden rule of this time its different is that it never is different.. hence the farcical nature of the statement 'this time its different'.


You can't use it like that and expect people to take you seriously. 

smartmil's picture

To ensure the safety of the procedure, check whether the pot is safe. It must be cleaned thoroughly after each use and it mustn’t be shared with other people. Store your nettie pot in well-ventilated areas (the bathroom counter, for example).

blindman's picture

@"..Again, this time it is different. I realize most people believe the Fed can just hit “print” and solve everything, but they’re wrong." ...
my friend, it is not about solving a crisis or solving
anything. it is about opportunity to steal under the
cover of crisis. i think it is an important distinction
with a difference. they are playing checkers under your
chess board. no?

jimmyjames's picture

The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in size


The ECB's balance sheet is nearly 8 trillion and PBOC balance sheet makes the Fed look like a bastion of responsibility-

Looks to me like the Fed has lots of room to print-

Freebird's picture

Graham please. That really is enough articles for one day.

q99x2's picture

Hey chicken little, if the Bernank gives the can a few more kicks what are you going to do for business then.

garypaul's picture

Intersting note: I just bought a Mc Happy Meal yesterday. Now up to $6.20(in Canada) but it comes with MICRO fries instead of small fries and the drink was smaller too.

Umh's picture

That's just raising the price because it's a healthier meal........

dizzyfingers's picture

lakecity55 :  thanks for good news!!!!

LawsofPhysics's picture

Looks to me like there will be no choice but to give deflation a try.   Right, as if the banks will let that happen.  War, death and destruction it is then.  same as it ever was.

lakecity55's picture

Can't find the earlier post with the hurricane pic. One poster said there was an ammo shortage.  We had a big show today, so I posted I would check it out. Here is what I found:

Anyway, Gun Show Update:

There was plenty of ammo, all calibers.

Plenty of weapons, all calibers.

Plenty of MREs, survival gear,

AND, 2,000+ people.  It was a madhouse. People were walking out with armloads of stuff. I mean, it was frenetic, and I have seen 200+ shows in my time.

There were good deals on 9mm, 5.56 and 7.62X39 I saw a lot of off-duty cops loading up, and some retired military guys, 1 from my old outfit. Country folk, too, LOTS of them.

The NRA guy was having a field day, so was the voter registration group.

There was only 1 thought on peoples' minds I talked to: Get rid of The International Man of Mystery in November.  They are not ignorant of the banksters' scam!


Blue Horshoe Loves Annacott Steel's picture

But, if they're replacing him with Mittens Romney, nothing will change.  If they don't understand that, they may as well turn all those guns on  themselves because ain't a damn thing gonna change.

Vince Clortho's picture

Most everyone agrees there is a major decision looming for the Fed.  Graham's article tries to anticipate the Fed's action based on the projected (catastophic) outcomes.

One thing that needs to be considered is that everytime the situation starts to deteriorate, The Fed kicks the can.  Why expect them to do anything different this time?  If they have no choices, why not try and buy some more time?

I think these boys have already factored in the consequences.

Lucius Cornelius Sulla's picture

Because long bonds are at all time lows so lower rates will not help.  Also, their balance sheet is already bloated which adds a lot more risk should inflation kick in and they are forced to unwind at a loss.

Satan's picture

Oh no...I was going to get promoted and get a raise in January. Looks like I'll be out looting and scavenging instead.

Random XYZ's picture

Most Americans are out of the markets, having been burned twice in the last 12 years. Think of all the ZH articles on outflows... So they're going to be more concerned about price of gas than about the price of SPY and IWM. So my interest is to see if TPTB want Obama reelected or not. To get reelected, Obama needs the price of gas to go down significantly by the end of October, that will have more voter influence than anything else. Then he can say I got this inflation thing under control.

But what does it take for gas prices to drop significantly? It would have to be part of the greater picture of commodities dropping. But QE would push commodities up! So given a choice and given that Bernanke owes his job to Obama being elected, they could choose to postpone QE until after the election, which have the effect of taking the markets down. Obama decide that the price of gas will do more to help him than the price of SPY.

OTOH, if the Fed doesn't care about Obama, they just care about the markets then we will see QE fairly soon no matter what Summers says about the illogic of it. But warning, any QE before the election will kill Obama's reelection hopes through its inflationary impact on commodities.

Which way the ball bounces? We'll see soon enough... But mark my words, if no QE before the election, it will definitely happen shortly afterwards when there is no more election at stake until 2014.

balz's picture

Obama or Romney are puppets. TPTB don't give a crap about which one it is. So whatever they will choose, it will be in their OWN interest.

Gringo Viejo's picture

Random: Just my personal take but I believe the power(s) behind the throne are done with Obama. I believe he has shown himself lacking in all aspects of "all things presidential." I think he's already been tossed under the bus.

LawsofPhysics's picture

LMFAO!!  The president is irrelevant, period.  Wake the fuck up already.

Lucius Cornelius Sulla's picture

Mel Brooks plays Obama (or GW ... take your pick) and Harvey Korman plays Lloyd Blankfien in the following clip:


dizzyfingers's picture



...and - really - always was, except to make important-sounding pronouncements -- mostly lies.

For my 67 years, all I've seen read and heard from D.C. has been smoke. The mirrors are shattered. Where's Dorothy in her silver slippers?

mp95bravo11208's picture

Wouldn't hyperinflation take a bit longer to kick in?  I'm talking 2-3 years before Americans say WTF.   This means logically the Fed will print money and lend a small fortune to Europe secretly with their damned currency swaps or hidden loans once again all in an effort to make sure Obama gets re-elected in November.

Obama can't possibly allow Europe to collapse and since he rules the Federal Reserve indirectly it is just about time to print and print and print some more.  They will most likely wait for a small crash here first driving the DOW down 3 or 4000 points at least. They figure American voters will forget this crash within 2 months or so after the fact as we all know  they are right if htis is their asumption and the market jups higher after.

Then 'Obama's policies'  come to the rescue they will claim.   As the Dow explodes upward due to the trillions injected into the economy, damning us all longer term, short term the devalued dollar will propel the market upwards giving all a goody feeling come November. 

The fireworks start (maybe literally as in Revolution) sometime in Obama's second term. 

God help us all we are in for the ride of our lives here. 

Here is a short 1 minute War trailer with great music for the coming years talking about Revolution in USA, Wars all over the Earth and a global libertarian-conservative movement to bring sanity to the planet.

spooz's picture

I don't see the Dow exploding up regardless of what the fed does at this point.

Sudden Debt's picture

Deflation this year, hyperinflation next year, burning citys in 2

Zero Govt's picture

Jim Sinclair will be pleased as he's plastered "HyperInflation" all over his cartoons. But he did a huge U-turn last week and said what they really meant was inflation of just the money supply but deflation of assets (though there's no deflation in the cartoons and he hasn't mentioned deflation in years!!)

Now The Boss has done a u-turn Turd Ferguson is going to have to catch up though he wouldn't hear of the 'D' word up to a month ago, "hyperinflation all the way!"

C'mon Turd, see if you can manage a turnaround as badly as stumbling stuttering Jim

Yes_Questions's picture



The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this is an election year).

Since when has the FED given a rats ass what is fucking servants thought?

Centurion9.41's picture

Please, did you not know when a blogger with a vested interest in creating fear to drive traffic and clients to their business uses words like "MASSIVE" {in caps non the less} points of reality matter not.

Although in macro, philosophy/ideology re fiat, cabal, etc., GS is correct on many things.  Anyone who tracks ZH on a regular basis know GS is a mini-squid, ala $GS, making a living off of adjectives & adverbs of fear; verifiable numbers are simply not his thing.


Gringo Viejo's picture

Just got back from a 2 week vacation on Cape Cod. I continue to stack and clean my weapons while my old lady catches up on Dancing With The Stars. "Babe, get off your dead ass and mix me another drink!" Just another Pleasant Valley Saturday.


spooz's picture

Why can't it be door number one without the hyperinflation because everybody else in the world is doing the same thing so what will cause dollar collapse against other currencies? Looks like Mish's deflation theory might have some legs.

JeffB's picture

Couldn't all the economies/currencies have a hyperinflationary experience simultaneously, even if they all reach the bottom at the same time in this race?

If prices doubled in the U.S., Europe, China and Japan in a month couldn't that be the start of a hyperinflationary spiral even if they all stayed roughly the same relative to each other in the currency markets?


spinone's picture

 I thought this was may/june, now its the end of the year?

Treeplanter's picture

I believe Spain is May-June, have to go back and check. Consider all newsletters mere sugestions.  You have to go with your gut like old Jesse Livermore.  It's all going to hell in a hand basket. Enjoy the ride.

Matt's picture

Well, I bet 100 percent that Spain does not collapse in May, since we are now in June.

Treeplanter's picture

My lawyer says I'm always right.  May-June.

WallowaMountainMan's picture

sure, at first glance, you got all the facts on your side, but i'll take the side that says spain does collapse in may.

all i have to do is hedge it enough to come out with net profit.

besides, if i can skim enough off the rehypothication of that potential net profit to pay my handsome salary, who cares.

i wasn't gonna pay you anyway. i got counterparty risk takers to do that.


derek_vineyard's picture

No, no he guaranteed a US market crash by may/june 2012.  Someone scoll back and read all his posts ...... oops I can't ask anyone to do that.  And maybe some would consider a net negative market year to date a crash (liesman, bernanke, spoiled baby boomers?)

Newsboy's picture

Timing is infamously hard to predict.

Lots of clever people are kicking really hard at this can, from a variety of angles, eh?

gdogus erectus's picture

Sounds like we better hurry if we're going to get that dinner with Barry.  These new ads are better than those Cramer ones.

StychoKiller's picture
  1. Monetize everything (hyperinflation)
  2. Allow the defaults and collapse to happen (mega-deflation)

  4. Option Three:  Lie about everything, while jetting off to meetings in exotic locales, and eat 5-star cuisine, while chasing the local native gals (or guys, if you swing that way!)