The End Result of the Fed’s Cancerous Policies and When It Will Hit

Phoenix Capital Research's picture

Many commentators consider what the Fed has done to be akin to providing stimulus, morphine, juice to an ailing economy.


We believe Fed’s actions would be more appropriately described as permitted cancerous beliefs to spread throughout the financial system, thereby killing Democratic Capitalism which is the basis of the capital markets.


Today we’re going to explain what the “final outcome” for this process will be. The short version is what happens to a cancer patient who allows the disease to spread unchecked (death).


In the case of the Fed’s actions we will see a similar “death” of Democratic Capitalism and the subsequent death of the capital markets.


We are, of course, talking in metaphors here: the world will not end, and commerce and business will continue, but the form of capital markets and Capitalism we are experiencing today will cease to exist as the Fed’s policies result in the market and economy eventually collapsing in such a fashion that what follows will bear little resemblance to that which we are experiencing now.


The focus of this “death” will not be stocks, but bonds, particularly sovereign bonds: the asset class against which all monetary policy and investment theory has been based for the last 80+ years.


Indeed, basic financial theory has proposed that sovereign bonds are essentially the only true “risk-free” investment in the world. While history shows this theory to be false (sovereign defaults have occurred throughout the 20th century) this has been the basic tenant for all investment models and indeed the financial system at large going back for 80 some odd years.


The reason for this is that the Treasury (US sovereign bond) market is the basis of the entire monetary system in the US and the Global financial system in general. Indeed, US Treasuries are the senior most assets on the Primary Dealers’ (world’s largest banks) balance sheets. To understand why this is as well as why the Fed’s policies will ultimately destroy this system, you first need to understand the Primary Dealer system that is the basis for the US banking system at large.


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.


You’re bound to recognize these names by the mere fact that they are the exact banks that the Fed focused on “saving” thereby removing their “risk of failure” during the Financial Crisis.


These banks are also the largest beneficiaries of the Fed’s largest monetary policies: QE 1, QE lite, QE 2, etc. Indeed, we now know that QE 2 was in fact was meant to benefit those Primary Dealers in Europe, not the US housing market. The same goes for QE 3 and QE 4.


The Primary Dealers are the firms that buy US Treasuries during debt auctions. Once the Treasury debt is acquired by the Primary Dealer, it’s parked on their balance sheet as an asset. The Primary Dealer can then leverage up that asset and also fractionally lend on it, i.e. create more debt and issue more loans, mortgages, corporate bonds, or what have you.


Put another way, Treasuries are not only the primary asset on the large banks’ balance sheets, they are in fact the asset against which these banks lend/ extend additional debt into the monetary system, thereby controlling the amount of money in circulation in the economy.


When the Financial Crisis hit in 2007-2008, the Fed responded in several ways, but the most important for the point of today’s discussion is the Fed removing the “risk of failure” for the Primary Dealers by spreading these firms’ toxic debts onto the public’s balance sheet and funneling trillions of dollars into them via various lending windows.


In simple terms, the Fed took what was killing the Primary Dealers (toxic debts) and then spread it onto the US’s balance sheet (which was already sickly due to our excessive debt levels). This again ties in with my “cancer” metaphor, much as cancer spreads by infecting healthy cells.


When the Fed did this it did not save capitalism or the Capital Markets. What it did was allow the “cancer” of excessive leverage, toxic debts, and moral hazard to spread to the very basis of the US, indeed the entire world’s, financial system: the US balance sheet/ Sovereign Bond market.


These actions have already resulted in the US losing its AAA credit rating. But that is just the beginning. Indeed, few if any understand the real risk of what the Fed has done.


The reality is that the Fed has done the following:


1)   Set itself up for a collapse: at $4 trillion, the Fed’s balance sheet is now larger that the economies of Brazil, the UK, or France. And with capital of only $54 billion, the Fed is leveraged at over 50 to 1 (Lehman was at 30 to 1 when it failed).


2)   Called the risk profile of US sovereign debt into question: foreign investors, now fully aware that the US’s balance sheet is suspect (the US has lost its AAA credit rating), are dumping Treasuries (see China and Russia). This has resulted in the Fed now being responsible for the purchase of up to 91% of all new long-term (20+ years) US debt issuance.


3)   Put the entire Financial System (not just the private banks) at risk.


The Financial System requires trust to operate. Having changed the risk profile of US sovereign debt, the Fed has undermined the very basis of the US banking system (remember Treasuries are the senior most asset against which all banks lend).


Moreover, the Fed has undermined investor confidence in the capital markets as most now perceive the markets to be a “rigged game” in which certain participants, namely the large banks, are favored, while the rest of us (including even smaller banks) are still subject to the basic tenants of Democratic Capitalism: risk of failure.


This has resulted in retail investors fleeing the markets while institutional investors and those forced to participate in the markets for professional reasons now invest based on either the hope of more intervention from the Fed or simply front-running those Fed policies that have already been announced.


Put another way, the financial system and capital markets are no longer a healthy, thriving system of Democratic Capitalism in which a multitude of participants pursue different strategies. Instead they are an environment fraught with risk in which there is essentially “one trade,” and that trade is based on cancerous policies and beliefs that undermine the very basis of Democratic Capitalism, which in the end, is the foundation of the capital markets.


In simple terms, by damaging trust and permitting Wall Street to dump its toxic debts on the public’s balance sheet, the Fed has taken the Financial System from a status of extremely unhealthy to terminal.


The end result will be a Crisis that makes 2008 look like a joke. It will be a Crisis in which the US Treasury market and sovereign bonds in general implode, taking down much of the US banking system with it (remember, Treasuries are the senior most assets on US bank balance sheets).


We cannot say when this will happen. But it will happen. It might be next week, next month, or several years from now. But we’ve crossed the point of no return. The Treasury market is almost entirely dependent on the Fed to continue to function. That alone should make it clear that we are heading for a period of systemic risk that is far greater than anything we’ve seen in 80+ years (including 2008).


The Fed is not a “dealer” giving “hits” of monetary morphine to an “addict”… the Fed has permitted cancerous beliefs to spread throughout the financial system. And the end result is going to be the same as that of a patient who ignores cancer and simply acts as though everything is fine.


That patient is now past the point of no return. There can be no return to health. Instead the system will eventually collapse and then be replaced by a new one.


This concludes this article. For a FREE investment report outlining how to protect your portfolio from a market collapse, swing by



Phoenix Capital Research



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Iam_Silverman's picture

"The short version is what happens to a cancer patient who allows the disease to spread unchecked (death)."

But, you still get to claim victory.  The cancer cells do not live on past your rigor mortis.

messymerry's picture

...and after that fateful day in 2008, the patient never regained consciousness.  The "family" insists that life support be maintiained, but the prognosis is expectant.  Negotiations are underway to arrange the harvesting of organs and everybody will be required to attend the funeral.  A dirge will be sung and we will all walk hand in hand to the cemetary to put our beautiful republic to rest.  R.I.P. United States glorious experiment in freedom. 

Stalin's Moustache's picture

When it all goes bad, I will miss Waffle House.

elwind45's picture

This meme is dead? It is getting croaked day after day and has never ever gained any traction ever ever ever

I Write Code's picture

But you don't seem to understand, the patient died in 2008 and what the Fed has been doing is more akin to animating a corpse.

mrdenis's picture

Don't you mean like Howdy Doody .....

Citxmech's picture

My guess it's more like "The Reanimator."  The Fed is Herbert West, and we are the one's getting screwed by their zombie economic creation. (Warning - graphic content)


H. Perowne's picture

Could take Graham a lot more seriously (especially because he's right) if he didn't consistently mistake tenet for tenant

chunkylover42's picture

Could take him more seriously if he hadn't been trying to sell his report "how to protect your portfolio from economic collapse" at the end of every post fothe last 4 years

Iam_Silverman's picture

"Indeed, basic financial theory has proposed that sovereign bonds are essentially the only true “risk-free” investment in the world. While history shows this theory to be false (sovereign defaults have occurred throughout the 20th century) this has been the basic tenant for all investment models and indeed the financial system at large going back for 80 some odd years."

Maybe he just means that those sovereign bonds are only renting a space in your portfolio?  Heavens knows, they are more likely than not to disappear in the middle of the night and leave you with a trashed out home full of litter and feces.  And, with all the "free" help from the Federal Reserve, those bonds are just like a Section 8 tenant

marathonman's picture

I know all this already, but it's been 6 years since the Great Recession and the system still soldiers on.  The TBTF banks still own the world.  Barack Obama is still President.  Eric Holder is still protecting the TBTF bankers and MIC. 

Collapse already...

Winston Churchill's picture

Patience, even Zimbabwe wasn't destroyed in a day.

CHX's picture

Why put when it will hit in the title, when clearly you do not know. Waste of time. That it will fail should be known by everyone reading ZH on a more or less regular basis. And when fiat burns, where purchasing will go, that most readers also do know. Hedge accordingly, and good luck to all.

Monty Burns's picture

True, it's the same old story we keep getting.  The only reason I read it was because he was going to tell us when.  But he did not.

nickels's picture

This is what happens when you apply math to things that don't exist.

MichaelNY's picture

Almost like it was The Plan, eh?

free_lunch's picture


A towering citadel housing what is essentially a sovereign state known as the Bank for International Settlements is located in Basel, Switzerland. The bank now controls the financial affairs of planet Earth.

If you think this is an exaggeration or the conspiratorial ramblings of the author . . . or not, I invite you to read on. I wrote the first installment of this article—“The Financial Crisis: A Look Behind the Wizard’s Curtain”—in mid-March of this year.

The article included the following statement:

The purpose of this financial crisis is to take down the United States and the U.S. dollar as the stable datum of planetary finance and, in the midst of the resulting confusion, put in its place a Global Monetary Authority—a planetary financial control organization “to ensure this never happens again.”

This purpose has now been accomplished.

The dollar, the former king of currencies, now goes begging in the pant-suited persona of Hillary Clinton to our creditors at the Chinese Communist Party.

Almost unthinkable a few short years ago, the U.S. dollar is fast losing its status as the world reserve currency, and any thought of saving it is being nuked by the Larry, Moe and Curly of U.S. economic policy - Bernanke, Geithner and Summers - and their Alice in Wonderland trillion-dollar budget deficits.

I would not be surprised to see central banks start using the renminbi (the currency of the newly awakened People’s Republic of China—also called the yuan) for international trade and reserves in the not too distant future. This prediction will likely be scoffed at by global economists, but then they have about as much credibility as pharmaceutical salesmen these days.

A more generally discussed alternative is the International Monetary Fund’s SDR (which stands for Special Drawing Rights). There is no production or property behind the SDR. It is one of those clown currencies that are made up out of thin air—a magic trick central bankers like to do. Intoxicated by the power of the purse, they think of themselves as fiscal alchemists.

But the dollar has seen its glory. It can return one day, if Washington ever finds its financial backbone. But let’s be real, with the exception of a very few, like Ron Paul in the House and Tom Coburn in the Senate, these folks are addicted to spending like junkies on horse.

More importantly, the other shoe has dropped. Like some ghoulish predator from another Alien sequel, a Global Monetary Authority has been born. It lives.

Full article: