During Round 1 of the Great Crisis, the US tried to combat the collapse of the private banking sector (especially the TBTFs) by shifting debt onto the public’s balance sheet and printing money to buy Treasuries so we could maintain a massive deficit (north of $1 trillion).
Put another way, the powers that be attempted to solve a MASSIVE debt implosion by issuing more debt. Aside from the fact this is outright insane, the problem with this is that we’re at a point of debt saturation in the system.
Kyle Bass of Hayman Advisors notes that from 1917 to 1952 each new Dollar of US debt brought on roughly $4 worth of GDP. From 2000-2010, you got seven cents of GDP growth for every $1 in new debt issued.
Put another way, each new $1 in debt issued today is producing less and less returns. By some estimates we’ve even reached the point at which new debt issuance is actually a net drag on the economy as interest payments eat into growth.
Ben Bernanke knows this, and has started to hint at it in his recent speeches and Q&A sessions with the public. Indeed, if you read between the lines of his statements starting in May, it’s clear that he has realized he cannot solve the US’s debt problems and that QE has failed.
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”
Pessimistic Bernanke Fed Admits QE Has Failed In FOMC Statement
In its latest FOMC statement, the Bernanke Fed has admitted the economy continues to remain depressed, essentially admitting that both programs of long-term asset purchases, or quantitative easing, have failed to prop up output after what has been the worst recession since the Great Depression.
“Monetary policy can do a lot, but monetary policy is not a panacea.” -- Ben Bernanke 9/29/11
U.S. "close to faltering," Fed ready to act: Bernanke
Asked whether another round of bond purchases, known as quantitative easing, was in store, Bernanke was noncommittal.
"We never take anything off the table because we don't know where the economy is going to go. We have no immediate plans to do anything like that," he said.
Central banks may need to burst bubbles: Bernanke
Federal Reserve Chairman Ben Bernanke said on Tuesday that central banks may need to resort to monetary policy to combat asset bubbles, although regulation should be a first line of defense.
Look at the progression there. As far back as May 2011, Bernanke admitted the benefits of QE were less attractive. Now he’s not only admitting that asset bubbles exist (something Greenspan never admitted) but that Central Banks may even need to “burst” them!?!?
In plain terms, the Fed will NOT be launching another round of QE or major policy changes until the next round of the Great Crisis hits in full force. And by that time it will be pointless anyway as once the defaults begin, the leverage in the global banking system will implode rapidly.
It is no longer a matter of “if” for defaults, it’s a matter of “when.” And we are going to be seeing defaults in the individual, corporate, banking, and sovereign space. This is going to be the Great Debt Reset: the time when the market calls out the global debt bubble and we enter a period of severe economic contraction accompanied by soaring interest rates.
In a best-case scenario, here’s how things will play out:
1) Greek default/ European default contagion will start before the end of 2011.
2) Japan and other major developed countries begin to face debt issues and default risks mid- to late-2012
3) US debt default/ systemic failure (2012-2013)
The worst-case scenario is that everything comes to a head in the next six months. Remember, the slow motion train wreck that is Greece has been playing out since the end of 2009. The market is already pricing in a Greek default. And Germany has even alluded to the fact that it’s preparing for a Greek default that will feature at least a 60% haircut. Heck, France has even announced plans to nationalize 2-3 banks “just in case.”
Folks, what happened in 2008 was literally just the warm up. The REAL DEAL is coming in the next 14 months. And it’s going to involve corporate, financial, and sovereign defaults.
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