Neither the Fed Nor the ECB Can Stop What's Coming

Phoenix Capital Research's picture


Today, we are witnessing the investment world’s slow awakening to the fact that the monetary actions taken by the world’s Central Banks have not in fact solved the issues leading up to the 2008 Crisis.


In point of fact, the Central Banks’ actions have exacerbated pre-existing problems  (excessive leverage) while simultaneously creating new problems (inflation).


This slow awakening has taken much longer than I would have expected, but with tens of thousands of careers on the line (financial professionals) as well as tens of trillions of dollars in portfolios at risk, the vast majority of professional market participants were highly incentivized not to realize these issues.


However, at this point, it is becoming clear that not only are financial professionals slowly realizing that 2008 was actually “the warm up,” but that Central Banks themselves are aware that they’ve:


  1. Failed to solve the issues leading up to 2008.
  2. Created other unforeseen problems.


Indeed, this process of realization first began in the US where we had signs as far back as April 2011 that the Federal Reserve was aware that QE (AKA monetization of US debt) was less “attractive” as a policy (read: not such a good idea).


The vast majority of the media and Wall Street analysts failed to recognize this, though Bernanke himself admitted it in public:


Q. Since both housing and unemployment have not recovered sufficiently, why are you not instantly embarking on QE3? — Michael A. Kamperman, Waco, Tex.


Mr. Bernanke: “Going forward, we’ll have to continue to make judgments about whether additional steps are warranted, but as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate…


The trade-offs are getting — are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. And in my view, if we’re going to have success in creating a long-run, sustainable recovery with lots of job growth, we’ve got to keep inflation under control. So we’ve got to look at both of those — both parts of the mandate as we — as we choose policy”


This admission marked the beginning of a process through which the US Federal shifted its policies from those of aggressive monetization to those of verbal or symbolic intervention.


I addressed this at length in the last issue of Private Wealth Advisory. But the main issue is that the Fed backed off from rampant monetization and began to simply issue verbal statements that it would ease if needed, thereby getting the same impact (boosting stock prices) without actually having to monetize debt/ print more money.


Indeed, the only monetary change the Fed has made in nearly a year was the launch of Operation Twist 2 in October 2011. However, even this policy was more about meeting immediate debt issuance needs in the US rather than printing money to prop up the market.


Operation Twist 2 was a policy through which the Fed would sell its short-term Treasury holdings and use the proceeds to buy longer-term Treasuries. The purpose of this policy was two fold:


  1. To make up for the lack of foreign demand in long-term Treasuries.
  2. To provide capital to banks by permitting them to unload their long-term Treasury holdings in exchange for new cash. 


Regarding #1, the Fed is now obviously aware that the policies it has pursued in tandem with the Federal Government, namely maintaining low interest rates while running massive deficits and increasing the Federal Debt to the tune of $100-200 billion per month, have severely damaged the US Treasury market.


This is only common sense. By running Debt to GDP and Deficit to GDP ratios that are on par with the European PIIGS, the US has made it clear that those investors who lend to it for the long-term (20+ years) are likely going to experience a haircut or bond restructuring much as Greece bondholders recently experienced.


Because of a lack of foreign interest in long-term Treasuries, the Fed decided to step in to pick up the slack. As a result of this, the US Federal Reserve has accounted for 91% of all new debt issuance in the 20+years bracket. Put another way, the US Federal Reserve is now effectively the long-end of the US debt market.


Operations Twist 2 has also allowed US commercial banks to unload their long-term Treasury holdings in exchange for new capital: something most of the Primary Dealers are in dire need of. This in turn helps to explain why the US stock market has advanced despite the fact that retail investors have been pulling out of the market in droves.


Put another way, the markets have been ramped higher by more juice from the Fed (and corporate buybacks). However, the fact remains that this juice has come from the Fed reallocating its current portfolio holdings, NOT printing more money outright to monetize US debt via QE.


So while the media and 99% of analysts believe the Fed is and can continue to act aggressively to prop up the markets, the fact is that the Fed has been reining in its monetary stimulus over the last nine months, largely relying on verbal intervention from Fed Presidents to push stocks higher.


We at Phoenix Capital Research have known this for some time. But the general public and financial media are only just starting to realize that the Fed, in some ways, is at the end of its rope in terms of monetary intervention. This has become increasingly clear in the Fed FOMC statements.


Consider the latest FOMC statement released yesterday…


Fed Signals No Need for More Easing Unless Growth Falters


The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target.


“A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2 percent, according to minutes of their March 13 meeting released today in Washington. That contrasts with the assessment at the FOMC’s January meeting in which some Fed officials saw current conditions warranting additional action “before long.”


Ignore the verbal obfuscation here. The Fed knows that inflation is higher than 2%. It also knows that US growth is faltering. The above announcement is the Fed essentially admitting its hands are tied regarding more easing due to:


  • Gas being at $4 and food prices not far from record highs.
  • This being an election year and the Fed now politically toxic.
  • Growing public outrage over the Fed’s actions (secret loans, etc.) in the past.


Again, we are in a process of slow awakening to the fact that the Fed has not solved the problems that caused 2008. Instead, the Fed has exacerbated these problems (excess leverage) and created new problems in the process (inflation).


Fortunately for the Fed, the European Central Bank has picked up the intervention slack since the Fed began pulling back in mid-2011. Indeed, between July 2011 and today, the ECB has expanded its balance sheet by an incredible $1+ trillion: more than the Fed’s QE 2 and QE lite combined (and in just a nine month period).


The two largest interventions were the ECB’s LTRO 1 and LTRO 2, which saw the ECB handing out $645 billion and $712 billion to 523 and 800 banks respectively.


As a result of this, the ECB’s balance sheet exploded to nearly $4 trillion in size, larger than the GDPs of Germany, France, or the UK.


This rapid and extreme expansion of the ECB’s balance sheet (again it was greater than QE lite and QE2 combined… in nine months) indicates the severity of the banking crisis in Europe. You don’t rush this much money out the door this fast unless you’re facing something very, very bad.


This rapid expansion has also resulted in the ECB obtaining a similar political toxicity to that of the US Federal Reserve. Indeed, those European banks that participated in the LTRO schemes have found their Credit Default Swaps exploding relative to their non-LTRO participating counterparts.


The reason for this is obvious: any bank that participated in either LTRO implicitly announced that it was in dire need of capital. As a result of this the markets have stigmatized those banks that participated in the schemes, thereby:


  1. Diminishing the impact of the ECB’s moves.
  2. Indicating that the ECB is now politically toxic in that those EU financial institutions that rely on it for help are punished by the markets.


Thus the two biggest market props of the last two years: the Fed and the ECB have found their hands tied. What will follow will make 2008 look like a joke. On that note, if you have not taken steps to prepare for the end of the EU (and its impact on the US and global banking system), 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:


Good Investing!


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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Sandmann's picture

the monetary actions taken by the world’s Central Banks have not in fact solved the issues leading up to the 2008 Crisis.


As if they could......Leverage was not a major problem when Keynes was alive.....most Investment Banks were still PARTNERSHIPS.  Most corporations were not quoted. Ford Motor Company was still a family business

Sudden Debt's picture

If the FED bought 91% of all new debt issuance in the 20+years bracket, and the banks got their money back, that means there's twice that money available and I call it printing untill they sell it back to the banks and cancel the funds (which will never happen).

I call that expansion of the money supply and the cause of inflation.


Bartanist's picture

Here is one thing that I do not understand. A bank creates "money' when it creates a loan. If the loan is provided to the Federal government in the form of a long bond then the government gets the money. If the government pays back the money plus interest, logic would dictate that the money created for the loan would be retired (it was created out of thin air for the loan and should return to thin air when paid back), but the interest would be kept by the bank for its expenses and profit.

Setting aside that the charging of interest makes it mathematically impossible to EVER pay back all of the loans, what happens when the Fed buys the long bond? The above article implies that instead of "retiring" the money, as logic would dictate, the bank keeps the money (as if it was something that was not created out of thin air) and then buys stock with it, propping up a market and destroying free market capitalism and price discovery in the process.

It appears that the assumption here is that the bank just "created" wealth (for itself) out of thin air by creating money out of thin air and then buying ownership shares in a company.

A. This looks like money laundering

B. This looks like counterfeiting

C. It implies collusive fraud ... a conspiracy of sorts.

D. Over time, all existing tangible assets will belong to the banks, which they have exchanged for money that they created out of thin air, have devalued over time and have charged interest for.

Fortunately value is created from labor and not from banks and if labor is used productively there will be an increasing supply of value created.

However, if labor is used unproductively, in banking, law, government/politics then the wealth of the nation will be slowly drained to nothing... and collected by the banks.

Sandmann's picture

You forget RE-HYPOTHECATION and think only in Bilateral Terms. Imagine the LOan to the US Government is a AAA-rated Bond and can be used by a Bank as collateral for a series of high-yielding Junk Bond loans in an Immunised Portfolio - then you will see Money Creation at its best. If the Government then retired the loan it would collapse the pyramid the Bank has created to increase its returns.

That is the problem. The Private Banks are creating the Money. Imagine that the New York Fed was told there would be no subsidy to Jamie Dimon to buy Bear Stearns and Bear Stearns positions would be liquidated. The House of Cards would collapse and we would find out how many 401Ks were involved and how much re-hypothecated and loaned shares from Pension Plans and Portfolios. we would see who has been Naked Shorting and just how far across the world the Ponzi Scheme stretched.

When The Darien Scheme collapsed in Scotland

collapsed in 1700 it wiped out 25% Scotland's money supply and forced it to merge into England to prop itself up. It still dreams of being a major force in the world but has no hope. That is what happens when you have someone able to fund your own disasters, what happens when all countries are basket-cases we do not know

DeltaDawn's picture

Yes, those who make money and loan it to the truly productive have quite the advantage!

Ron Paul suggests much of our debt could be retired by the Fed because they created it out of thin air, but alas his voice is drowned out.

GUCCI's picture

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q99x2's picture

I've already had to start eating the first batches of long term storage foods that I bought back in the 80s. This can't go on much longer. My tuna is priced at an ounce of silver a can after the crash but I'm going to have to start eating that too.

Johnk's picture

"FIVE Reasons the Market Could Crash This Fall", July 30, 2009, S&P 500 @986

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


Good Investing!

marketcycles79's picture

My friend echen at Humblestudent blog has been providing great cycle work on the markets for years. Please see his work at

I highly recommend the analysis provided and think it is a unique insight to the markets not found elsewhere.


jonjon831983's picture

Bloomberg posted an article, US Avg gas now $3.78/gallon



Psyman's picture

You say it's a free report but when I follow the links I see the same old 80 page sales pitch trying to get me to subscribe to your newsletter.


And your charity of choice is some scam operation that gives money to Mexican and South American drug dealers and the orphans they create.  Sorry, I'd rather not give money to filthy Hispanics.  I pay taxes already.

Pejorative Requiem's picture

The Fed and the ECB may not be able to stop what's coming, but they absolutely WILL continue to monetize debt. I found the way Malcolm Berko described it a little amusing:

On the way to the Berkshire Hathaway shareholders meeting, a well-to-do traveler stops in Benton, Arkansas and considers staying the night. He enters the local hotel, and puts a $100 deposit on a room, a decision to stay pending on inspection of the hotel and the area. The hotel owner agrees...... as soon as the traveler is out ofsight, the hotel owner runs to the hardware store to pay an outstanding bill there. The hardware store owner immediately runs to the the local bar to pay his tab there. The bar owner takes the $100 and pays the man he hires to sweep and clean. The sweeper takes the $100 to the hotel owner, who he rents a room by the week, and pays his rent. The well-to-do traveler, back from his inspections, informs the hotel owner he has decided not to stay. The hotel owner gives him his $100 back.

No good has been made, no service has been provided, but that $100 bill made a whole town feel like they were just that much better off.

Operation QE-Twisty right around the corner.

Sandmann's picture

That story is so old and should stay in the textbook because it fails to address LEVERAGE - it is nothing more than Cheque-kiting.

You really should think of Stage 2 of that cycle - businesses need to sell every day to keep cashflow

The Fed and ECB have blown it just as in the last scene of the Wizard of Oz

That is your Central Banker

Bartanist's picture

... and that is the way it works when finance is provided without interest.

However, once the banks start taking interest off, at every step, for the credit they provide, over time that $100 diminishes to $0.

cdskiller's picture

While I agree that nothing can be done, I completely disagree with the opening sentence:

"Today, we are witnessing the investment world’s slow awakening to the fact that the monetary actions taken by the world’s Central Banks have not in fact solved the issues leading up to the 2008 Crisis."

The investment world has known beyond a shadow of a doubt that the dye was cast and that nothing would be done to solve the issues that led to the crisis from the time that Bear was bailed out. Since that day, smart money has been feasting, cannibalizing, predating, concentrating, threatening, positioning itself, lying through its teeth, taking no prisoners and hoarding in anticipation of what it knew was going to be an inescapable global catastrophe of unprecedented proportions, or haven't you been paying attention? Kill, or be killed, has been the name of the game for everyone since the fall of 2008. The major players in the investment world don't give a shit if entire countries go down. In fact, they need it. They have determined that haircuts are not possible because they are that insolvent. They will bankrupt America, Britain, Greece, Iceland, Ireland, Spain, Italy, France and Germany if need be.

The question is not if the bill will come due, but who will pay it and how disorderly the fight will be. Avoiding disorder is the order of the day and it's another way of describing torture and economic fascism. To say they are only now becoming aware is like saying that the investment world did not know there was a housing bubble starting around 2005, or that they didn't know they had fraudulently created trillions of MBS paper junk, and that they SUDDENLY, EN MASSE, starting in early 2005, took a virtually non-existent CDS market to over $60 trillion in less 3 years just for kicks. I mean, slow awakening? Are you kidding? When AIG collapsed, the only rational policy choice was to force transparency on the CDS market with the intention of shutting it down. When that wasn't done, it was clear information that policy makers were blinking, that the pot was too big and that the threats had worked! So, what did the investment world do? IT DOUBLED DOWN, MY FRIEND. The credit default swaps market has doubled since then to a record high of over $70 trillion.

Their only worry now, as ZH readers have come to know, is China. China is hoarding gold and on the verge of collapse. China remains disorderly.

Taint Boil's picture



..doubt that the dye was cast..

...........of course we are not coloring clothes, you mean set in stone. Sorry, just being an asshole. Rock on bro

Michael's picture

A direct line of blame for the destruction of the greatest country on Earth, the USA, can be drawn directly to the Federal Reserve and Federal Government spending.

The question should now be, Were the actions of the Federal Reserve and the Federal Government worth destroying the US economic empire? 

DeltaDawn's picture

For the destroyers it will be worth it. For the hapless victims, not so much.

orangegeek's picture

Government intervention - done by politicians for politicians to get re-elected.


There is no peak oil, just peak debt and peak government.


The long term for the Dow via the weekly is not looking good.

markar's picture

When they can't hide the fact growth is faltering any longer, they will print. It's all they can do.

AldousHuxley's picture

Fed can't stop themselves from more QE.


It will be all ok. more QE coming up just in time for elections.


Who care about inflation. Americans are stupid and can barely do math. They were spending more when their home values were going up due to inflation.


Jsut because it is unattractive doesn't mean Ben won't pull it off. He is kind of the guy at parties that makes out with fat ugly chicks just to score. No standards. Then he will lie about it later.

Pejorative Requiem's picture

Hey man, you do a dis-service to fat ugly chicks........ and to scoring with fat ugly chicks. Uncle Ben won't lie; he'll brag.


azzhatter's picture

I heard he was making out with Timmy at a soiree a couple of weeks

BanjoDoug's picture

This is an interesting article, and probably correct, yet I am sorry to say that all of this is meaningless (worthless verbiage, etc) IF REACTOR # 4 @ Fuckishimo melts down (as TEPCO reported on 5-16-12).   There is not enough savings, precious metals, financial manipulation schemes, etc., to cover over the radiation problem that will affect our planet.   These financial problems will be the least we have to worry about.....

Psyman's picture

The Anglo-Zionist elite will simply relocate to its pre-positioned bases in the Southern Hemisphere.  Australia, New Zealand, Paraguay, Chile.  Neo-Israel (or maybe "New Zion") will be what it should have been in the first place, Madagascar.

John_Coltrane's picture

And yet the Japanese recovered nicely from Hiroshima and Nagasaki-and those were bombs.  Remember one important thing:  radiation strength drops off as the inverse square of the distance from its source.  So, to illustrate, if the strength is normalized to unity 1 mile from the source it is 1/1000000 = 10-^6 of that strength 1000 miles away.   Those power laws are powerful! The problem of lack of nuclear power is much more important as you will freeze and starve in the dark long before any mutations from radiation can kill you.  Or in Japans case die of heat stroke this summer without the electricity from their nukes.

Bollixed's picture

"Remember one important thing:  radiation strength drops off as the inverse square of the distance from its source. "

Without arguing with the math or physics in your post, what you left out is the radioactive particles caught up in the airstream decay at the same rate as those found on the reactor site. But they travel long distances and hence pose a danger wherever they land in concentration. That location becomes the new source.

New World Chaos's picture

I have heard that a single microscopic particle of plutonium dust in the lung inevitably leads to cancer.  Because the distance to lung DNA is essentially 0, the local dose is enormous.  Most of that radiation will be alpha particles.  They can't penetrate your outer layer of dead skin cells but they do extreme damage to living tissue, so you really don't want an alpha emitter lodged inside your body.  This is why the plutonium in the spent fuel pool is such a concern.

Jack Sheet's picture

"private wealth advisory"
Sounds like a low dose of viagra

Diamond Jim's picture

problem have politicians and media still blaming the Financial Crisis of 2008 on Wall Street. The greed of Wall Street was one factor. But when you look at the part of the easy $$$ Fed Res AND the damned politicians that passed legislation that encouraged the greed...repeal of Glass-Steagall, no money down on real estate, get unqualifieds into homes and easy home mortgages, the spending boom, and forever wars you will find the real culprits. The American sheeple still believe their politicians and the media. So most will not see the change up being signalled for. Until we get a true investigation, luxury gold handcuffs for the perps, we will be flying blind and no one will wake up until the poo hits the fan for real.

Bartanist's picture

Yes, but Wall Street "purchased" Gramm-Leach-Bliley (repeal of Glass-Steagall) and the Commodity Futures Modernization act of 2000.

Without Wall Street greed and the large banks ability to create money out of thin air and then use that freely created money to bribe, corrupt and buy influence; Congress would not be tempted by corruption and would be free to govern as their conscience guides.

It still goes back to the greed of the banks and their corrupting influence... and intention.

SKY85hawk's picture

Well said, Jim:

Let's go one step farther and point out the suicidal loop between freebies for the sheeple and politicians selling votes.

I really don't think the gummint will punish themselves for ZIRP.  THAT is the ultimate CAN kicked down the road!

Sigh  .  .  .  .

SKY85hawk's picture

Well said, Jim:

Let's go one step farther and point out the suicidal loop between freebies for the sheeple and politicians selling votes.

I really don't think the gummint will punish themselves for ZIRP.  THAT is the ultimate CAN kicked down the road!

Sigh  .  .  .  .

SKY85hawk's picture

Well said, Jim:

Let's go one step farther and point out the suicidal loop between freebies for the sheeple and politicians selling votes.

I really don't think the gummint will punish themselves for ZIRP.  THAT is the ultimate CAN kicked down the road!

Sigh  .  .  .  .

YesWeKahn's picture

Bernanke is a double talker, I never trust this idiot.

AldousHuxley's picture

bernanke: QE is not money printing. It is not debt monetization. It won't be inflationary.


Buffett: it is monetization.


Gold: It is also hyper inflationary.

XtraBullish's picture

Why is that Graham gets a ton of air-time only after the market tanks for a few sessions? He has been calling for "the Crash" every post since 2008 during which time the S&P has rallied from 666 to over 1,400. All you need to do is get "short" cash/currencies/fiat against "stuff" including gold/silver. Any other strategy is useless and no I won't be "signing up" any time soon.

CPL's picture

I think you are both talking the same point.

HungrySeagull's picture

It's easy to walk away from a Job that requires lying and bullshit along with buttsniffing and mutual party line parroting.

The more this shit goes on, the more metal I stack.

cbaba's picture

Thank you Graham, very good explanation of twist: why Fed not printed money but stocks are higher.

falak pema's picture

what the world sees is the end of Pax Americana; the Reaganomics experiment and the fiat spiral that began in 1971. Now the whole first world is polluted and deflation or war are the only solutions. There is no easy way out. And PMs wont protect anyone as Caesar can burn it whenever he wants to. And we are heading to central government as there is no other solution as the Oligarchs are already global and the political assemblies now have to counter balance that or crumble in decay. 

If Americans want their country back they have to decouple with globalisation of Oligarchy concoction. And reinstate their republic on an honest basis for, of the people. The rest is literature and sham scam. 

Psyman's picture

The global Anglo-Zionist military empire hasn't even begun its decline yet.  10 carrier groups and global bomber reach back the U.S. dollar.  And there are no challengers in sight.

SheepDog-One's picture

Good article...lots of haters but whatever, botton line nothing has been fixed, things are far worse, and on the edge of imploding and I agree Bernank's hands are largely tied. Anyone banking on Bernank showering them with free money soon is better off investing in Facebook.

TheInfoman's picture

While I agree with the article as written, I would sure feel better if it were not written by someone who is trying to sell you something at the end of his article.  ZeroHedge shouldn't accept those types of pieces in that they are self-serving.

cbxer55's picture

I guess you did not read far enough to see that it is free. Reading comprehension is highly recommended before commenting.


Graham: Perhaps you should highlight the FREE part, bold, underline and italicize. This way these stupid comments about you selling something will hopefully go the wayside.

DosZap's picture


Dude, you ever BAITED a hook?.

Obviously not.

cbxer55's picture

I know where you are coming from. I was a subscriber to his newsletter. I stopped because it was the same stuff over and over again. And yes, trying to get you to become a paid member was a big part of it. But still, for what is being discussed here, the stuff is free. No one forces you to become a paid member. The newsletter is free.

The newsletter is just constantly telling you the end is nigh, and be prepared. It gets old fast. Still I'll not zing him for at least trying to get paid members. It's what he does. His spiel is just mostly not for these ears. I can deal with his daily stuff here without a problem. But constantly filling my email inbox with the same is annoying to say the least.

Yeah, I've baited hooks before. But its been years since I last fished. ;-)

RockyRacoon's picture

Get used to it.  Either accept the info at face value -- or not.  You're looking a gift horse in the mouth. 

Graham Summers has been given space here longer than you've been posting here.

Running the financial traps now and then is a useful exercise; it keeps us out of the weeds.