The REAL $200 TRILLION Problem Bernanke’s Worried About

I’ve stated before that Bernanke isn’t interested in interest rates for employment of economic purposes. We now have definitive proof this is the case.



As you can see, interest rates have actually RISEN after the announcement of QE lite, QE 2 AND Operations Twist #2.


The evidence is clear, QE has not lowered interest rates. Indeed, the only time rates FELL in the last two years was when the Fed WASN’T engaged in QE (May 2010-August 2010 and June 2011-September 2011).


So what gives? Does the Federal Reserve not have a stockcharts account? Don’t tell me that with the TRILLIONS spent bailing out banks the Fed can’t afford to print a couple hundred bucks to see Treasury yields. Heck, there are plenty of FREE sources for Treasury charts.


Jokes aside, it’s clear the Fed is engaged in QE for another reason or reasons. I believe they are:


1)   To absorb the insane debt issuance to permit the US’s massive deficit.

2)   To keep the interest rate based derivative market in check.


Regarding #1, it’s no surprise that the US has been running a deficit that would make Greece proud. Indeed, the primary strategy of the powers that be since the Great Crisis began in 2008 was to attempt to make up for the sharp downturn in the private sector by spending obscene amounts of money.


The Fed played a big part in this.  Indeed, since QE 1 was announced the Fed has bought over $1.2 TRILLION in Treasuries. The Fed claims it isn’t funding the deficit directly. That’s only partially correct. The Fed is supposedly buying old Treasuries from the banks. However, the definition of “old” can mean one or two weeks.


Tell me with a straight face that isn’t somehow buying new Treasuries.


As for the derivatives situation or #2 in my list above, 82% of the $244 TRILLION in derivatives sitting on US commercial bank balance sheets are based on interest rates. Put another way…


US Commercial banks have $200 TRILLION in interest rate based derivatives sitting on their balance sheets. And guess which banks have the greatest exposure?



Looks a lot like the list of the VERY banks the Fed has been giving the most money/ preferential treatment to. Coincidence? Nope. This is the $200 TRILLION problem Bernanke’s so worried about. It’s THE reason he keeps funneling money to the TBTFs.


And he WILL lose control of it, just as he did in 2008.


Consider that Financial leverage levels today are higher than during the Tech Bubble. Only this time, the problem will be far FAR worse.




Because 2008 was caused by the Credit Default Swap (CDS) market which was $50-60 trillion at the time. As I stated before, the interest-rate based derivative problem is $200 TRILLION in size.


Even if only 4% of this is “at risk” and 10% of that “at risk” money blows up, you’ve STILL pretty much wiped out the equity at the TBTFs.


You think Bernanke might be worried?


On that note, if you have yet to prepare yourself for what’s coming, now is the time to do so. Whether it’s by moving to cash and bullion, opening some shorts, or simply getting out of the markets altogether, now is the time to be preparing for what’s coming (remember, stocks took six months to bottom after Lehman… and that was when the Fed still had some bullets left to combat the collapse).


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Good Investing!


Graham Summers


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