Exactly Why This Time IS Different And the Fed Will Be Powerless to Stop What's Coming

Phoenix Capital Research's picture

Over the last two years, I’ve been caught into believing a Crash was coming several times. In some ways I was right: we got sizable corrections of 15+%. But we never got the REAL CRASH I thought we would because the Fed stepped in.


So 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




Again, this is not Doom and Gloom, this is reality.

So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called Surviving a Crisis Four Times Worse Than 2008 and it’s chock full of information on how to not only survive but thrive during if this particular black swan (or any of the others lurking in the system) comes to pass.

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com under the OUR FREE REPORTS tab.

Good Investing!

Graham Summers

PS. We also feature four 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: http://www.gainspainscapital.com


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Cheduba's picture

"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)."

I assume the statement referring to this happening twice before refers to the dismantling of the First and Second Bank of the United States?

tricky rick's picture

Portfolios?  You still have money in the markets?

 In this environ of robot controlled, hft traded, "NO odds" gambling establishment called the market?

I pity the fools who HAVE to be there but they will NOT play with my money anymore.

Why is all that retail cash on the sidelines?  We'll wait til you $$ gladiators destroy themselves thank you very much.


WAMO556's picture

We are at the Tyler Durnden Center For Children Who Can't Read Good And Wanna Learn To Do Other Stuff Good Too, we teach you that there's more to life than being really, really ridiculously good-looking.

Sorry man - no self restraint on this one!!!

By the Way - Where is TRAV7777

akak's picture

By the Way - Where is TRAV7777

Trav was banned, for reasons unknown --- and good riddance, too, to an increasingly vile and antagonistic bastard who finally had become little more than a trollish parody of himself.

quasimodo's picture

Anyone else becoming immune, maybe a bit hardened, to all these friggin predictions that never happen?



WAMO556's picture

When did Noah build the Ark???

Before the rain started!

DosZap's picture

No,because sans a  HUGE miracle it will be here...........when the time is ripe.

Our job is just be ready.

WAMO556's picture

TYLER - What do you know about the Byzantines - the reason that I am asking is this - the Byzantines had everything, logistical control of the asian land route, sex slaves (until that got religion - channeling your recent article on GS and Adultfinder - haha) sea lanes that linked the black sea with the Med, THEY WERE GREEK/ROMAN, AND THEY A SHITPOT ALOT OF MONEY. Lots of money. So putting the question inside your brain housing group to come up with a answere would be interesting. The reason? I suspect that America (NOW) is more like Byzantine then any other civilization. What say you man????!!!! OH YEAH, I FORGOT ONE MORE THING - AND UTTERLY CORRUPT. Throughin and Throughout!


Praetorian Guard's picture

I want a DOOM DATE!!! WHEN?!?!?!?!? Always seems to get pushed down the road, another month, year, decade...

WAMO556's picture

Not yet... But you will see it in the news.

Google - Iran, EMP and the first dollar war.

Read. Illumination.

Praetorian Guard's picture

Thanks. I do read - lots!! The only thing is everyone's doom date comes and goes. I realize that everything would have imploded by now if it was not for QE et al, and that the authors of said articles were probably right, they just did not factor in the Fed riding to the "rescue"... I'm sure the days of Lone Bernanke and Hi-Ho Fiat are coming to an end... then ML and CoG kick in...

WAMO556's picture

No man - you got it all wrong - what is going on is this - The FED is READING WHAT you have to say - RELIGIOUSLY; Don't think so??? And why do you think that???? It is not a bad thing, red cell is about how to crack a nut. You get experts from all walks of life sit them down, tell them what the perceived problems are, give them parameters to work in (time, space, resources - current and future, etc...) and then fuse that information by someone who knows how to. Oila, you did man!!! and the amount of info that comes here is TRULY BEAUTIFUL. An artist par excelence. Anybody who thinks that this just about buying gold and silver is out of their damn minds.

IF is the middle word of LIFE!

If I leave tommorrow, will you still remember me...Free as a bird.

skepticCarl's picture

The Fed is not in a box, not out of ammo, and not out of options.  The printing option is endless.  The Fed very intentionally, and openly, is devaluing the dollar. Their target for devaluation is stated as 2%, whereas it really is quite a bit more than that.  And that is what government, wall street, and big international business want. That is how these three plan to move us through (we never get out of) the debt crisis. The Fed put up with the dot.com implosion, the housing bubble, and the 2008 meltdown, and it will put up with whatever new crap that comes along.

AGuy's picture

"I see EUR devaluation"


how will that play out with brent oil at $125? Already the price of Gasoline is about $8 to $10 a gallon in the EU. thats with the current  Euro evaluation. if anolther club med is forced to leave the euro, the rest will abandon ship shortly after.

LowProfile's picture

About 80% of that EU gas price is taxes, which the various EU nations could easily cut (not like they get all that much revenue from it anyway).

Elmer Fudd's picture

Well, just hit print anyways I could use a brainwashing in nominal terms.

AGuy's picture

"[if] the Fed were to announce a new policy it would have to be MASSIVE, as in more than $2 trillion in scope"


Two Trillion is pocket change for the fed that can print unlimited quantities of dollars. The fed will only become powerless when the value of the dollar nears zero. The Fed will have to start another round of QE soon because they will run out of treasuries for operation twist. The Fed needs to print more than a trillion a year in new dollars just to keep up with Fed gov't borrowing.  The Fed needs to print for the US gov't to stay open, and that's what they will do. The day the fed stops printing is the day the federal gov't collapses. Probably when they can't get anymore paper and ink to run the presses. I envision the 100 trillion federal reserve note with a portrait of Bernanke. "This note is toilet paper for all asses, public and private".


"If they opt for #1, Germany will leave the Euro."

Everyone will be leaving the Euro, regardless of inflation (money printing) or deflation. Every EU member country has high debt and unsustainable wealthfare and entitlement programs. A EU  jubilee is on its way as gov't default on debt and promised obligations. The only question is when does it start and how fast will the US, and Asian dominos follow.





WAMO556's picture

Fuk NO man, the FEd is going to PRINT AND CREATE (electronically) quadrillions. Tim Geithner said so, when he said that the number would "make you uncomfortable" - and the boy refused to answere the question other then a oblique (better yet - BYZANTINE) ANSWER!!! The printers aren't warming up - THEY ARE HUMMING AND PRINTING RIGHT NOW!!! Don't you get it, they aren't going to stop, the money is GOING everywhere - The FED is counter acting the Chinese influence along with the INDIANs by buying everything up in central asia, all the while chins and Inds are buying up africa and south america. Just saying!!1

God Bless The Virtuous's picture

Look, this is so simple, it will make Steve Liseman cry, really!

There will be no QE part 333!

Bernanke is not only impotent but his respect and credibility are all but gone, flushed down the crapper with the rule of law in this once mighty country.

Bernanke will be forced to defend the U.S. dollar!

You read that right. Why do you think the big, so called smart money has driven this market to the heavens? The bots will take over soon and we will have the last leg down in the final wave.

Does anyone really think APPLE, which not that many years ago needed Bill Gates(government forced)money to avoid bankruptcy, will become a TRILLION dollar cap stock!

Just to put that in some sort of perspective, a trillion seconds,

you know like in 60 seconds in a minute.

A trillion seconds equals what? 500 years? 1000 years? 10,000 years?

Try 32,000 years!

This market has been so perverted by Bernake and Geithner,not to mention the communist in chief, I can barley speak the horrid name, we are destined to retest the 2009 lows!

S&P target is 589.85, pick a number, its the mother of all manipulated / rigged ponzi schemes and will end in disaster!

The dollar is and will remain the reserve currency, China is a sloppy / poorly run excuse for our socialist minions to pooh pooh about her might!

Watch Sunday nights, the last wave will start there(in Asia) and by the time we open on some Monday morning, the triggers will be tripped and the markets here will shut down for their prescribed time-outs, maybe for the day.

The flash crash and the impotent handling of it by the SEC and the buffoon running it, Mary Shapiro will become everyday events in the future and Bernanke will be forced to respond with the full weight of this country or risk France Fox Pivens call,"To riot in the streets of this country, what are they waiting for?"

There will really be "Blood in the streets" if the standard of living is debased to far with this moron(Bernanke) and his ilk on Wall Street and their call for never ending QE!

May the good lord watch over this fragile little experiment in freedom we call America


marathonman's picture

The Fed would have to feel assured that the other candidate for POTUS is deep in the pocket and currently they aren't getting that warm and fuzzy feeling.  With Ron Paul out there as a potential 11th hour Convention buster, they have to support Obumbler and so I don't believe the markets will completely tank.  They may correct here 10-15%, but I don't think the bottom falls out yet.  If Obumbler wins re-election (egads!) then the wheels can and will come off.  But probably whoever inherits this hoopty is in for a barn-burner crisis.  If the second coming of Robert Mugabe is in charge then expect martial law and flagrant government looting of everyone with a pot to piss in.

Lord Peter Pipsqueak's picture

"So given that the Fed will only be able to announce a large scale program in reaction to a Crisis,"

The history of the Fed is littered with incidents where it creates a crisis in order to justify/impliment policies it wanted to enact anyway - remember the circumstances surrounding the implementation of TARP? Paulson more or less came out and threatened congress with a stock market collapse if they didn't write the blank cheque.

Expect a repetition of this when the time comes. They will deliberately crash the market to justify Bernanke hitting the nuclear button.

cdude's picture

" Paulson more or less came out and threatened congress with a stock market collapse if they didn't write the blank cheque."


.... and let's not forget Summer's prediction that without TARP, unemployment would rise to 8.2% within six months. Went to 10.2 (print) in spite of TARP et al. 

LawsofPhysics's picture

What is stopping a debt jubilee for the banks?  They all hold each other's bad paper and gold.  What is to stop them from getting together and deciding to "call it even" on the debt and then "revalue" gold to pay off creditors who complain.  With gold at some crazy high it would not take much.  "Here China, for our debts, what's that, you still need to feed those folks, fine, give us back some of the gold for food and energy."  The fucking world is broke, period.

LowProfile's picture

Because one man's debt is another man's asset.

A Jubilee would force a writedown worldwide.  People would be wiped out.

At that point, the entire world raises it's sleepy head and roars "WHAT THE FUCK?!  What is the root cause of this shit?!" and POOF!  ...No more central banking, central control, imperial expansion, NWO, etc.

I think that will happen in 3-5 years anyway, via either extreme (or even hyper) inflation...   But one is by design, the other is despite their best efforts.

LawsofPhysics's picture

Unless the entities saying "what the fuck" actually have any power it would not matter.  Both options can be "by design".

LowProfile's picture

Don't underestimate strength in numbers, especially when most of your gun-toting enforcers are in that number as well.

The Bulletproof Patriot's picture

On top of this, with Lehman outrageously leveraged at something like 30:1 prior to the 2008 debacle, the Federal Reserve is leveraged at 53:1 (capital to assets).  It isn't quite the same as your neighborhood bank being leveraged to that degree (because the Fed can print money to make up its losses), but it is another good indicator of how bad the structural defects are in the economy.


LowProfile's picture

Thanks, I knew they were levered up more than the ECB, just couldn't remember how much more.

tony bonn's picture

"..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..."

the sad thing is that people believe this pompous lying sack of shit...

LowProfile's picture

Not sure why you think that.  The Fed wouldn't be out there propagandizing if they felt they didn't need to.

I think the Fed is recognizing it has a serious credibility problem.

AGuy's picture

But it campaigning to the wrong people. Its not the US public that it needs to be concerned with, but foreign creditors, especially those that provide the US with strategic goods (energy, business\industrial electronics, equipment, etc). If our creditors stop accepting US dollars for payment, Ol' Ben has a serious problem.



DosZap's picture


But it campaigning to the wrong people. Its not the US public that it needs to be concerned with, but foreign creditors, especially those that provide the US with strategic goods (energy, business\industrial electronics, equipment, etc). If our creditors stop accepting US dollars for payment, Ol' Ben has a serious problem


In case you missed it thats happening now, China,Russia,India, BRICS, are in the process of starting their own Banking cartel........sans US Fed.Complete w/ with their own SWIFT mechanism..........................

How do you stop them from using any currency they want?.......YOU cant.

So, we are already starting to see the bricks crumbling on the reserve currency.

The US public will suffer greatly if this comes to pass.............we need imports,and lots of them.Plus if your fiat is no longer trusted, the value goes to hell.

seamus3500's picture

that's when we bomb them for not complying...like the soon to be iran "issue".

Dicite justitiam's picture

Yeah, but bad idea to bullshit a counterpart.  Foreign creditors see through it and it damages what thin trust they might have.  That's why they are diversifying their transactional pathways away from USD settlement where legitimate alternatives form.


Keep watching, and pay close attention to the dynamics of trust and civil liberties, they are the true leading indicators.

XitSam's picture

I think he he sees a potential credibiltiy problem and is preparing the battlefield among the sheeple but the issue has not taken hold yet. Look at this chart. Not a major increase but significant. Note the weak non-English language searches.

The Navigator's picture

Note the weak non-English language searches

Note Singapore at #2  - that's Jim Rogers googling "gold standard , fiat currency, fiat money" - /sarc

Lots of ME (oil) money bought property there, so maybe they got a fat finger poised over the CNTRL-Sell-Treasuries button while keeping track of gold & fiat articles. If that's not it, you gotta boat load of (non-sheeple) Singaporeans worried about paper money.

LowProfile's picture

Good point.

Things are not working out like he had planned, and he's smart enough to see this is likely to worsen.

LowProfile's picture

Everything here makes sense...  


AFAIKT the ECB is in better shape than the Fed (not NEARLY as levered, in real terms and in derivative/rehypothecated terms, so they have cover for some printing), the German gov't may simply ignore their constituents and stay in the EUR anyway, and the eurozone banks don't have the same derivative problem the US/UK system has (I include the two since US banks take funds to the UK where they can evidently rehypothecate to oblivion).

So, as far as I can tell Mr. Summers is arguing for EUR deflation and/or eurozone breakup.  I just don't see that.

I see EUR devaluation, forcing the USD upwards, causing another "flight to safety".  Treasuries get a lift, the USD gets a lift, USD denominated assets (equities/commodities) take a major hit.

Then somebody gets elected here in the US (unfortunately it's unlikely to be Ron Paul, who would scuttle this scenario), and THEN the Fed prints.  In size.  You think you've seen size?  You ain't seen shit bitchez.

This causes the eventual loss of the USD as a reserve currency, and with any luck, breaks the back of the US/UK (should really write UK/US) banking cartel.  Asia puts a new 1:1 backed metals exchange in place, and gold finally trades without shenanigans.

I figure this takes about three years from here.

But I am at heart, an optimist.

Of course, these are simply all educated guesses, formed from attempting to integrate everything I've read on the subject (and in addition to considerable outside reading, I've read everything from ZH since it's inception, albeit sometimes with less than 100% comprehension).  So I appreciate any and all thoughtful input to this scenario.

AustriAnnie's picture

I also question the "Germany will leave the Euro" forecast.

Since they seem to be easily taking over power in the region, I wonder if they would leave the Euro when they may benefit more from the power of orchestrating the crisis to their advantage?

If there is to be printing, they have a lot to gain from that position of power.  Those who get printed fiat first gain the most, and if Germany can control who gets what, how much, and to which terms they have to agree in order to get it....?

steve from virginia's picture


It's impossible to depreciate the euro during currency deflation if the EU's trading partners don't want or accept it.

The Chinese won't allow it (they hold hundreds of billions of euros) and neither will the Americans.

Euro failure will  be more existential, that is, who anyone use it?

The problem not mentioned is petroleum constraints and the absence of an 'earnings-based economy'.  The outcome is lurching from crisis to crisis between bouts of relief and hopefulness.

Greece is effectively outside the eurozone, Ireland and Portugal have sharply diminished credit access/demand. The credit balance is divvied up between today's survivors. This isn't capitalism, it is cannibalism.




LowProfile's picture

I agree with everything but your first sentence.  Why would it be impossible for the ECB to monetize debt?  TTBOMK It's not like anybody else really has a say in it.

metaforge's picture

Good thoughts.  Seems you agree with Mr. Summers that the Fed will go all in, and I concur.  As to whether Germany stays in the EUR should a massive CTRL-P take place, I could see it going either way.  I guess we'll have to just wait & see.  Keep that portfolio hedged for either hyperinflation or massive deflation, bitchez!