For the week ended June 27, the Fed flooded the financial system with $76 BILLION in liquidity. Bill King of the King Report puts that number into perspective noting that it’s BIGGEST increase since September 22, 2008 right after Lehman Brothers collapsed. That’s right, the Fed just juiced the system as much as it did when Lehman Brothers went under. While a shockingly large single money pump, the Fed’s generally been flooding the system with liquidity at a pace equal to that of 2008 since the beginning of the year.
Politicians who have all been bought out by the banks have fallen for this charade so far. But it won’t last much longer. Banks may get you elected… but they can’t keep you safe from a populace that is rioting outside your door. So the banks will all be taking a BIG hit in the future. This in turn will kick off another 2008 episode along with food shortages, civil unrest, outbreaks in crime, bank holidays, and the like. It will, in short, be like what’s going on in the Middle East today (though NATO won’t be bombing us).
How bad must things be getting that Geithner, a man who has lied and swindled the American people with impunity, and has never once suffered the consequences of his actions, is voluntarily “getting out of Dodge”? The answer: BAD.
Let’s consider this. If you’re a central bank and you actually believe in the value of paper money and your ability to create wealth by printing it…why would you be loading up on Gold? The answer is simple: you see the writing on the wall. These guys know that the financial system is broken. They’ve known it for over a decade (Greenspan even admitted that derivatives could “implode” the market in 1999)
Not only is the financial system more leveraged than during the Tech bubble, but mutual funds are more heavily invested than at any time in the last 40+ years. To say that the potential for a full-scale market collapse is high would be a gross understatement. Should the market begin to crater, the margin calls (when an investor has to put up more capital to cover a losing position that was bought using borrowed money) could be absolutely enormous.
Consider that $10 billion of Fed money today is worth just over half (62%) the market gains of $10 billion in Fed money back in 2009. Put another way, every new injection of $10 billion from the Fed is producing less and less results. If we step back and look at this plainly, we will see that reality does not in any way match the view that the Fed’s liquidity will solve the financial world’s problems. In fact, we see that each Fed move is having a smaller and smaller impact on the financial markets. Extend this idea out a bit further and you find that we will reach a point at which the Fed will no longer have any control over the financial markets.
In the last 100 years we’ve seen the US Dollar lose well over 95% of its purchasing power. However, once the world collectively dropped the Gold standard (the last hold out, Switzerland, officially went off it in 2000) permitting the creation of endless credit and money printing, the financial system entered a period of relative value. That is, all currencies (which are used to denominate other asset classes) are entirely paper-based and consequently trade relative to each other based on the money printing each central bank engages in.
With most of Wall Street absent in advance of the long weekend, those few traders on the street took advantage of the low volume to gun the market higher last week. This, combined with end of the Quarter performance gaming resulted in the market going positively vertical. So it’s difficult to believe the stock market rally from last week as totally legitimate and not by end of the quarter performance gaming by hedge funds taking advantage of the light volume. This week’s action will go a long ways to explaining what’s to come in the weeks ahead.
The take home point with all of this is that the Fed is in fact powerless to address, let alone fix, the Financial Crisis that began in 2007. Indeed, the Fed’s key role in creating it was to let Wall Street dictate the Fed’s moves. And now that the Fed is supposed to solve the Financial Crisis, we’re finding out not only do they have no clue how to do it, but they’re even aware of this fact
Bernake is slowly losing control of the system. In 2007, he was putting $30 billion into the system here and there. In 2008-2010, he upped the ante to $50 billion PER MONTH. QE 2 pushed the amount up to $100 Billion per month. And here he is, hinting at giving ANOTHER $300 BILLION when QE 2 ends!?!?
Regardless of what Greece does, the facts remain that we are headed into another Crisis in the near future. The global economy has already begun to roll over. Social unrest has spread from the Middle East to Europe. The US is now actively raiding pension funds to fund its debt issuance, and more.
The world is awash in garbage debt. The only reason the banks and others haven’t taken the “hit” that they NEED to take is because they’ve bought out the politicians. Put another way, we are seeing clearly that the two primary principles of the West (capitalism and democracy) have both become jokes: alleged “capitalists” like the banks don’t ever actually see losses for mistakes and “democratically elected” leaders are in fact owned outright by the banks via donations/ bribes.
For 80+ years, the US financial system has operated under the belief that the Federal Reserve could handle any problem. This belief was put to the ultimate test in 2008 when the Fed faced off against the biggest Financial Crisis of the last 80 years. And the ONLY thing that kept us from the brink was the belief the Fed could fix things. It couldn’t. And we’re all beginning to see that now.
I want to be clear here. The US Dollar is ultimately a doomed currency. But it remains the “flight to safety” trade amongst global currencies (along with the Yen and most of all, Gold). Europe is far worse off than the US. And China’s now seeing a liquidity crisis of its own. With that in mind, we need to consider that the US Dollar may in fact be predicting another deflationary collapse.
