New DVDs By Michael Snyder
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 Some top Federal Reserve officials have come up with a really bizarre proposal for stimulating the U.S. economy. As unbelievable as it sounds, what they actually propose to do is to purposely raise the rate of inflation so that Americans will stop saving so much money and will start spending wildly again. The idea behind it is that if inflation rises a couple of percentage points, but consumers are only earning half a percent (or less) on their savings accounts, then there will be an incentive for consumers to spend that money as the value of it deteriorates sitting in the bank. Yes, that is how bizarre things have gotten. It is not as if U.S. consumers are even saving that much money. Several decades ago, Americans typically saved between 8 and 12 percent of their incomes, but over this past decade the personal saving rate got down near zero a number of times as Americans were living far beyond their means. Once the recession hit, Americans very wisely started saving more money, and so now the personal saving rate has been hovering around the 5 to 7 percent range. This is well below historical levels, but the folks at the Fed apparently are eager for Americans to pull that money out and start spending it again.
In an article entitled “Fed Officials Mull Inflation as a Fix“, Wall Street Journal columnist Sudeep Reddy described this bizarre new economic approach that some over at the Federal Reserve are now advocating….
“But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed’s informal target.”
Does increasing inflation as a way to stimulate the economy sound like a good idea to any of you?
These are supposed to be some of the brightest economic minds that our nation has produced.
Unfortunately, it is becoming increasingly apparent that the folks running the Federal Reserve do not have a clue about sound economic policy.
Anyone who lived through the “stagflation” days of the 1970s should know that inflation does not spur economic growth.
But now some of the most prominent Fed officials are publicly proposing that we should purposely generate more inflation so that “real interest rates” (interest rates with inflation factored in) will go down.
For example, during a recent interview the president of the Federal Reserve Bank of Chicago, Charles Evans, made the following statement….
“It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment needs is lowered, that would be one channel for stimulating the economy.”
If you truly grasp what Evans is proposing here, your jaw should be dropping.
He is basically coming right out and saying, “Hey, let’s go out and crank up the inflation rate so that American consumers will start recklessly spending their money again.”
So are Americans really saving too much money?
Of course not.
Just take a look at the chart below.
Americans are actually still saving far, far less than they used to. As you can see from the chart, in the 1960s and 1970s Americans would usually save somewhere between 8 to 12 percent of their incomes.
Today, we are still well below that level. But we have made some progress from the reckless days of five to ten years ago when Americans were living far, far, far beyond their means and basically saving next to nothing….
So now some top Fed officials want to undo all that. They apparently want Americans to grab their credit cards and to run out to the stores and spend wildly like they did a few years ago.
But spending recklessly is not going to repair our economy. In order to have a healthy, balanced economy you need to have a healthy personal saving rate. Encouraging Americans to spend every last nickel they have may boost economic figures in the short-term, but it will make our long-term problems even worse.
But it is not just Federal Reserve officials that are advocating this kind of nonsense. Just a few months ago, IMF chief economist Olivier Blanchard suggested that it might be a good thing if western nations doubled their inflation targets from two percent to four percent.
It seems like almost everyone is in an inflationary mood these days.
The Federal Reserve keep dropping hints that it is ready to print lots more money and unleash another huge round of quantitative easing.
Just this past week, the Bank of Japan shocked world financial markets by cutting interest rates even closer to zero and by setting up a 5 trillion yen quantitative easing fund.
In fact, nations all over the world have become increasingly eager to devalue their national currencies in an attempt to gain an edge in international trade.
So after years of relatively low inflation, it looks like our leaders are almost eager to tangle with the inflation tiger once again.
But it might not be so easy to tame the next time.
Once a really bad inflation spiral gets going it is really hard to stop.
But in the end, it is not going to be Barack Obama or the U.S. Congress that is going to decide if we pursue these inflationary policies or not.
Ultimately, these decisions are in the hands of the unelected, unaccountable Federal Reserve.
If you don’t like it, too bad. When was the last time a U.S. president or the U.S. Congress really stood up to the Federal Reserve? It just doesn’t seem to happen.
The Federal Reserve is going to do what the Federal Reserve wants to do, and the rest of us are going to have to live with it.
Of course we could all try to elect candidates who would demand more accountability from the Federal Reserve this fall, but unfortunately those kind of candidates are few and far between.
The sad reality is that at this point, the Federal Reserve is pretty much completely and totally out of control. The U.S. dollar has already lost over 95 percent of its value since 1913, and now the Federal Reserve is giving every indication that inflation is going to get even worse in the years to come.
But flooding the system with more paper money is not going to solve anything. Instead, it is just going to make it even harder for average American families to buy milk and bread and to put gas in the car.
Inflation is a hidden tax on every single dollar that we already own. It is a destroyer of wealth and a wrecker of currencies.
But now some of the top officials at the Fed see inflation as a key tool in creating “economic growth”.
With such a clueless collection of idiots running our economy (and the Federal Reserve does run our economy) do any of you actually believe that there is hope for the U.S. economic system in the long run?
 What in the world is going on over at the Federal Reserve? Has it gotten to the point where the Federal Reserve is completely and totally out of control? There is increasing speculation in the financial community that the Federal Reserve is on the verge of unleashing another round of quantitative easing. In fact, at their September meeting, Federal Reserve officials hinted very strongly that quantitative easing is very much on their minds when they stated that the Federal Open Market Committee “is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.” You might want to reread that quote a couple of times just to let it sink in. Do you see what the Fed is saying there? The Fed is actually saying that it has a mandate to maintain a certain level of inflation. Not that this is a secret to anyone that has seriously studied the Federal Reserve. Since 1913, inflation has constantly gone up, U.S. government debt has increased exponentially and the U.S. dollar has lost over 96 percent of its value. But for Federal Reserve officials to openly state that a certain amount of inflation is part of their mandate is absolutely stunning.
Even though the U.S. economy is still in pretty decent shape at this point (for the moment at least), the Federal Reserve still seems obsessed with trying to stimulate it.
In the past, the Federal Reserve would just cut interest rates whenever the economy needed a bit of a boost, but at this point the Fed has cut rates to nearly zero. There just isn’t any more room to cut rates.
So what else can the Federal Reserve do?
Well, it can create money out of thin air and use it to buy U.S. Treasuries, mortgage-backed securities and other assets. This is known as quantitative easing, and many analysts fear that it is quickly becoming more than just an emergency measure.
Back in March 2009, the Federal Reserve announced that it would purchase $1.7 trillion worth of U.S. Treasuries and mortgage-backed securities over the next 6 to 9 months. That was the first round of quantitative easing and Fed officials believe that it helped the U.S. economy avoid an even worse downturn.
But now Federal Reserve officials are talking about making quantitative easing a regular thing. An article in the Wall Street Journal recently described the current thinking inside the Fed….
Rather than announce massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.
Quantitative easing that is open-ended?
What kind of insanity is this?
Is quantitative easing going to become a permanent part of our financial system?
And what does “smaller-scale” actually mean?
Well, according to James Bullard, the president of the St. Louis Federal Reserve Bank, “small-scale” is actually pretty darn large. According to the Wall Street Journal, a “small-scale” quantitative easing program would be somewhere in the neighborhood of $100 billion a month….
Under a small-scale approach, Mr. Bullard says, the Fed might announce some still-undecided target for bond buying—say $100 billion or less per month. It would then make a judgment at each meeting whether continued action was needed.
If the Fed injected $100 billion a month into the economy through quantitative easing, that would mean that by the end of the year over 1 trillion dollars would have been created.
That does not sound like “small-scale” to me.
In fact, if the Federal Reserve purchased $1 trillion in U.S. Treasuries next year that would be an amount nearly equal to the total amount of new debt that the U.S. government plans to issue during the year.
Can anyone say Ponzi scheme?
When we get to the point where the Federal Reserve is “buying” a large percentage of new U.S. debt with money that is created out of thin air there is simply no denying the fact that the Fed is running a massive Ponzi scheme.
But the truth is that the U.S. government is in so much debt and the U.S. economy is in so much trouble that something must be done. It is really tempting to “inflate away” the debt and to pump up GDP figures with a flood of paper money, and Helicopter Ben Bernanke has certainly shown that he is not shy about pulling the trigger.
Of course more debt, more paper money and more inflation will only make our long-term economic problems even worse.
But right now Federal Reserve officials appear to be absolutely obsessed with the short-term.
And without a doubt world financial markets are certainly expecting a new round of quantitative easing to begin soon.
CNBC recently polled 67 economists, strategists and fund managers about what they think is going to happen. The following is a summary of what CNBC found….
The Federal Reserve will boost its balance sheet by about half a trillion dollars over a six-month period beginning in November and keep it inflated for up to a year, according to a survey of leading markets participants by CNBC.
But many analysts believe that the Fed will take even more substantial action than that. According to the Wall Street Journal, economists at Goldman Sachs are projecting that the Federal Reserve will end up buying at least another $1 trillion in assets during this next round of quantitative easing.
Stephen Stanley of Pierpont Securities in convinced that it will be even worse than that. Stanley believes that the Fed will add another $3 trillion to its balance sheet by next August. The following is what he recently told CNBC….
“If the Fed pulls the trigger, they will go big.”
In an interview with the Economic Times of India, Marc Faber painted an even bleaker picture….
“I believe that if the S&P in the US drops 15-20% to around 900-950, the Fed would come out not with this quantitative easing No. 2, but with quantitative easing No. 2, 3, 4, 5, 6, 7, 8, 9, 10 until the asset markets go up again. They are going to print and print and print.”
It seems like almost everyone is anticipating that the Federal Reserve is going to fire up the printing presses.
Now, even some of the Federal Reserve’s staunchest defenders are now abandoning them.
Ambrose Evans-Pritchard, perhaps the most respected financial columnist in the U.K., recently penned an article entitled “Shut Down the Fed (Part II)” in which he absolutely lambasted Bernanke and other Federal Reserve officials for considering another round of quantitative easing….
I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.
In fact, Ambrose Evans-Pritchard is now openly accusing the Federal Reserve of being out of control….
So all those hillsmen in Idaho, with their Colt 45s and boxes of krugerrands, who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control.
On behalf of those who believe that the Federal Reserve is “a hyperinflating establishment cabal”, I accept Ambrose Evans-Pritchard’s apology.
The truth is that the Federal Reserve is out of control.
The Federal Reserve system was designed to get the U.S. government into a perpetually expanding spiral of debt. Wealth is slowly but surely transferred from the American people to the U.S. government (when we pay taxes) and ultimately into the hands of those who own U.S. government debt.
As long as the Federal Reserve system exists, U.S. government debt will keep going up, the value of the U.S. dollar will keep going down and wealth will be slowly transferred into the hands of the ultra-wealthy.
And why in the world would the American people allow an unelected, privately-owned central bank to run the U.S. economy, control the money supply, set interest rates and print all U.S. currency?
It simply does not make any sense.
The Federal Reserve has not been shy about declaring that it is “not an agency” of the U.S. government and not directly accountable to the American people.
So why do the American people put up with this kind of nonsense?
The truth is that the Federal Reserve has become far too powerful. U.S. Representative Ron Paul recently told MSNBC that he believes that the Federal Reserve is actually more powerful than Congress…..
“The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress.”
The truth is that the U.S. economy will never be fundamentally “fixed” simply by electing another “Bush” or another “Obama”. Something needs to be done about the Federal Reserve system, but right now our politicians in Washington can’t even muster enough support to pass a bill to audit the Fed.
So what do you think about the Federal Reserve? Please feel free to leave a comment with your thoughts….
 Don’t worry everybody. Federal Reserve Chairman “Helicopter Ben” Bernanke says that the U.S. economy is going to be just fine, and that if it does slip up somehow the Federal Reserve is ready to rush in to the rescue. That was essentially Bernanke’s message to an annual gathering of central bankers in Jackson Hole, Wyoming on Friday. Bernanke insisted that even though the Federal Reserve has already cut interest rates to historic lows it still has plenty of tools that could be used to stimulate the U.S. economy if necessary. Well, considering Bernanke’s track record, the “don’t worry, be happy” mantra is just not going to cut it this time. After all, if Bernanke and his team were such intellectual powerhouses the “surprise” financial crisis of 2007 and 2008 would not have caught them with their pants down. The truth is that just before the “greatest financial crisis since the Great Depression” Bernanke was telling everyone that the economy was just fine. So are we going to let him fool us again?
But Bernanke insists that this time is different. This time the Federal Reserve really has got a handle on things. During his remarks at Jackson Hole, Bernanke said that the Fed will adopt “unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”
Unconventional measures?
Could that be a thinly veiled way of saying that Helicopter Ben and his pals will do as much “quantitative easing” as they feel is necessary to keep the economy moving forward?
Unfortunately, most Americans have absolutely no idea what quantitative easing is.
Basically, when quantitative easing takes place the Federal Reserve creates money “ex nihilo” (out of thin air) and uses that money to buy stuff like U.S. government bonds and mortgage-backed securities. By pumping money into the economy like this, the hope is that banks will start lending more and people and businesses will have more money to spend.
As far back as 2002, Bernanke has been openly advocating “easy money” policies as a way to stimulate the U.S. economy out of troubled times….
“The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”
Now, before we go on and discuss some of the problems with quantitative easing, it must be noted that the statement by Bernanke above is absolutely rife with errors.
It is absolutely frightening that someone like Bernanke has more power over the U.S. economy than any member of Congress or even the president of the United States.
First of all, the U.S. government does not issue our dollars. They are issued by the Federal Reserve.
Just pull out a dollar bill right now. It says “Federal Reserve Note” on it right at the top.
Secondly, the U.S. government cannot produce as many dollars as it wants. Whenever it wants more U.S. dollars it has to give U.S. Treasuries to the Federal Reserve in exchange.
If the U.S. government could produce as many dollars as it wants, it could just print up $13 trillion and pay off the national debt tomorrow.
But under the current system, it cannot do that. The Federal Reserve controls the currency, and the truth is that the Federal Reserve is a private central bank that is about as “federal” as Federal Express is.
Thirdly, there is always a cost for producing more dollars. We’ll talk about inflation in a moment, but first it must be noted that any time “the printing presses are fired up” the U.S. government goes into more debt, and every time the U.S. government goes into more debt, more interest must be paid on that new debt.
So there is a very high cost involved in the creation of more dollars.
In addition, every time a new U.S. dollar is created, every other U.S. dollar becomes a little bit less valuable. Essentially, the more dollars there are in existence, the less purchasing power each dollar is going to have. This phenomenon can be masked or delayed for a while, but inflation will always triumph in the end when the money supply is constantly expanded.
The U.S. dollar has lost over 95 percent of its value since the Federal Reserve was created in 1913. This has not been a mistake. The Federal Reserve system is designed to slowly but surely inflate the U.S. dollar. What they do want to avoid, however, is doing it too quickly.
And this is exactly what is in danger of happening in the years ahead. As the U.S. money supply dramatically expands in response to the exploding U.S. national debt we are eventually going to be dealing with some very, very serious inflation.
Right now, the Bush and Obama administrations have been getting the United States into so much debt that there aren’t enough buyers in the world to absorb it all (at least at the current super low interest rates on U.S. government debt). So, instead of raising interest rates to a point where U.S. debt would be suitably attractive to investors, the Federal Reserve is stepping in and is “buying” (once again with money created out of thin air) all the excess U.S. Treasuries that don’t sell. This is essentially a Ponzi scheme and it keeps interest rates on U.S. Treasuries artificially low.
In addition, the Federal Reserve has been handing gigantic sacks of cash to very large banks and financial institutions such as Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup at almost zero percent interest and those big banks and financial institutions have been turning around and investing a large percentage of that cash in U.S. Treasuries. This has created a gigantic U.S. Treasury carry trade bubble, and it has enabled many of these giant financial monsters to make massive piles of essentially risk-free cash. This is another Ponzi scheme.
But these Ponzi schemes are not sustainable and they cannot last forever. Right now Bernanke and his cohorts have been able to finance trillions in U.S. government debt and still keep interest rates on U.S. Treasuries and inflation very, very low. At some point, their juggling act will come to an end and we will have a gigantic mess on our hands.
But for right now, Bernanke seems quite please with himself. The following is how Bernanke concluded his speech at Jackson Hole….
As I said at the beginning, we have come a long way, but there is still some way to travel. Together with other economic policymakers and the private sector, the Federal Reserve remains committed to playing its part to help the U.S. economy return to sustained, noninflationary growth.
In Bernanke’s fantasy world, the U.S. economy is going to roar back to life and will soon be stronger than it ever has been.
But don’t you believe him.
The truth is that every single month the U.S. economy is seeing large numbers of jobs leave the country.
The truth is that thanks to our exploding trade deficit, the U.S. economy is poorer at the end of every single month than it was at the beginning.
The truth is that every single month the U.S. government (along with the vast majority of state and local governments) gets even deeper into debt.
The United States economy is not on the road to prosperity.
The United States economy gets poorer and deeper in debt every single month and is slowing bleeding to death.
Ben Bernanke can run around all he wants and try to convince us that “the sky isn’t falling”, but at some point the American people are going to wake up and simply not believe him anymore.
 Sometimes there are things that are so shocking that you just do not want to report them unless they can be completely and totally documented. Over the past few years, there have been many rumors about a coming global currency, but at times it has been difficult to pin down evidence that plans for such a currency are actually in the works. Not anymore. A paper entitled “Reserve Accumulation and International Monetary Stability” by the Strategy, Policy and Review Department of the IMF recommends that the world adopt a global currency called the “Bancor” and that a global central bank be established to administer that currency. The report is dated April 13, 2010 and a full copy can be read here. Unfortunately this is not hype and it is not a rumor. This is a very serious proposal in an official document from one of the mega-powerful institutions that is actually running the world economy. Anyone who follows the IMF knows that what the IMF wants, the IMF usually gets. So could a global currency known as the “Bancor” be on the horizon? That is now a legitimate question.
So where in the world did the name “Bancor” come from? Well, it turns out that “Bancor” is the name of a hypothetical world currency unit once suggested by John Maynard Keynes. Keynes was a world famous British economist who headed the World Banking Commission that created the IMF during the Breton Woods negotiations.
The Wikipedia entry for “Bancor” puts it this way….
The bancor was a World Currency Unit of clearing that was proposed by John Maynard Keynes, as leader of the British delegation and chairman of the World Bank commission, in the negotiations that established the Bretton Woods system, but has not been implemented.
The IMF report referenced above proposed naming the coming world currency unit the “Bancor” in honor of Keynes.
So what about Special Drawing Rights (SDRs)? Over the past couple of years, SDRs have been touted as the coming global currency. Well, the report does envision making SDRs “the principal reserve asset” as we move towards a global currency unit….
“As a complement to a multi-polar system, or even—more ambitiously—its logical end point, a greater role could be considered for the SDR.”
However, the report also acknowledges that SDRs do have some serious limitations. Since the value of SDRs are closely tied to national currencies, anything affecting those currencies will affect SDRs as well.
Right now, SDRs are made up of a basket of currencies. The following is a breakdown of the components of an SDR….
*U.S. Dollar (44 percent)
*Euro (34 percent)
*Yen (11 percent)
*Pound (11 percent)
The IMF report recognizes that moving to SDRs is only a partial move away from the U.S. dollar as the world reserve currency and urges the adoption of a currency unit that would be truly international. The truth is that SDRs are clumsy and cumbersome. For now, SDRs must still be reconverted back into a national currency before they can be used, and that really limits their usefulness according to the report….
“A limitation of the SDR as discussed previously is that it is not a currency. Both the SDR and SDR-denominated instruments need to be converted eventually to a national currency for most payments or interventions in foreign exchange markets, which adds to cumbersome use in transactions. And though an SDR-based system would move away from a dominant national currency, the SDR’s value remains heavily linked to the conditions and performance of the major component countries.”
So what is the answer?
Well, the IMF report believes that the adoption of a true global currency administered by a global central bank is the answer.
The authors of the report believe that it would be ideal if the “Bancor” would immediately be used as currency by many nations throughout the world, but they also acknowledge that a more “realistic” approach would be for the “Bancor” to circulate alongside national currencies at first….
“One option is for bancor to be adopted by fiat as a common currency (like the euro was), an approach that would result immediately in widespread use and eliminate exchange rate volatility among adopters (comparable, for instance, to Cooper 1984, 2006 and the Economist, 1988). A somewhat less ambitious (and more realistic) option would be for bancor to circulate alongside national currencies, though it would need to be adopted by fiat by at least some (not necessarily systemic) countries in order for an exchange market to develop.”
So who would print and administer the “Bancor”?
Well, a global central bank of course. It would be something like the Federal Reserve, only completely outside the control of any particular national government….
“A global currency, bancor, issued by a global central bank (see Supplement 1, section V) would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing.”
In fact, at one point the IMF report specifically compares the proposed global central bank to the Federal Reserve….
“The global central bank could serve as a lender of last resort, providing needed systemic liquidity in the event of adverse shocks and more automatically than at present. Such liquidity was provided in the most recent crisis mainly by the U.S. Federal Reserve, which however may not always provide such liquidity.”
So is that what we really need?
A world currency administered by an international central bank modeled after the Federal Reserve?
Not at all.
As I have written about previously, the Federal Reserve has devalued the U.S. dollar by over 95 percent since it was created and the U.S. government has accumulated the largest debt in the history of the world under this system.
So now we want to impose such a system on the entire globe?
The truth is that a global currency (whether it be called the “Bancor” or given a different name entirely) would be a major blow to national sovereignty and would represent a major move towards global government.
Considering how disastrous the Federal Reserve system and other central banking systems around the world have been, why would anyone suggest that we go to a global central banking system modeled after the Federal Reserve?
Let us hope that the “Bancor” never sees the light of day.
However, the truth is that there are some very powerful interests that are absolutely determined to create a global currency and a global central bank for the global economy that we now live in.
It would be a major mistake to think that it can’t happen.
 Fannie Mae and Freddie Mac have become gigantic financial black holes that the U.S. government endlessly pours massive quantities of money into. Unfortunately, if the U.S. government did allow Fannie Mae and Freddie Mac to totally implode, both the mortgage industry and the housing industry in the United States would completely collapse. So essentially the U.S. government finds itself between a rock and a hard place. Prior to the financial crisis of the last few years, Fannie Mae and Freddie Mac were profit-seeking private corporations that also had a government-chartered mission of expanding home ownership in America. But now that they have been officially taken over by the U.S. government, they have become gigantic bottomless money pits. It is hard to even describe just how much of a mess Fannie and Freddie are in. However, the unprecedented intervention by Fannie Mae and Freddie Mac in the mortgage market over the past couple of years has been about the only thing that has kept it from plunging into absolute chaos. So what does the future hold for Fannie Mae and for Freddie Mac? Well, according to one estimate, it could take another 5 trillion dollars to “fix” Fannie Mae And Freddie Mac.
Yes, you read the correctly. According to an article in the Christian Science Monitor, Fannie Mae and Freddie Mac are facing $5 trillion dollars in liabilities that the federal government is going to have to deal with one way or another….
An exit strategy could involve adding Fannie and Freddie’s roughly $5 trillion in obligations, in effect, to a federal balance sheet that already includes $13.3 trillion in federal government debts. The GSE obligations would be a different animal, because those liabilities would need to be covered by taxpayers only if things went bad in the housing market.
It is hard to even put into words how much money that is. If you were alive when Jesus was born, and you spent one million dollars every single day since then, you still would not have spent one trillion dollars by now.
But Fannie Mae and Freddie Mac are not a one trillion dollar problem.
They are a five trillion dollar problem.
And if the housing market gets even worse (which it will), that figure could rise substantially.
Of course the U.S. government should have never gotten into the mortgage business in the first place, but these days the U.S. government is intervening in virtually every industry.
And don’t expect U.S. government support for the mortgage industry to stop any time soon. In fact, U.S. Treasury Secretary Timothy Geithner says that the U.S. government plans to continue to play a prominent role in back-stopping mortgages in order to keep the U.S. economy stabilized.
But if the only thing keeping the U.S. housing industry from plunging into the abyss is unprecedented intervention by the U.S. government, what does that say about the overall health of the U.S. economy?
Mortgage defaults and foreclosures continue to set new all-time records even with all of this government intervention. In fact, major U.S. banks wrote off about $8 billion on mortgages during the first 3 months of 2010, and if this pace continues it will even exceed 2009’s staggering full-year total of $31 billion.
Not only that, but construction of new homes in the U.S. and applications to build new homes in the U.S. both declined to their lowest levels in more than a year during July.
And things are rapidly getting even worse for Fannie Mae and Freddie Mac. Mortgages held by Fannie and Freddie are going delinquent at a very alarming pace as the Christian Science Monitor recently explained….
As of March 31 this year, 6.3 percent of mortgages held by Fannie and Freddie are either seriously delinquent or in foreclosure. Although that’s down slightly from the figure three months earlier, it represents a big one-year rise (from 3.9 percent in early 2009).
An increase in delinquencies of over 50 percent in just one year?
That is not a promising trend.
If the U.S. housing market takes another big dive in the next few years, and things certainly look very ominous at the moment, what in the world is that going to do to Fannie Mae and Freddie Mac?
So what is the solution?
Well, on Tuesday the Obama administration invited prominent banking executives to offer their thoughts on the mortgage market.
So what was the consensus?
It was something along the lines of this: “Please, oh please, oh please continue propping up the 11 trillion dollar mortgage market.”
So much for capitalism, eh?
When even the banksters are begging for massive ongoing government intervention you know that the game has changed.
Adam Smith must be rolling over in his grave.
But this is where we are at.
We are on the verge of a horrific economic collapse, and it is only enormous intervention by the U.S. government that is holding things together.
Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration backed approximately 90 percent of all home loans made during the first half of 2010.
So where would we be without the government?
Of course we could let the whole thing collapse and allow housing prices to eventually settle at a level where people could actually afford them, but what fun would that be?
No, for now the U.S. government will continue to endlessly spend billions of dollars to prop up a system that is artificially inflated and that is destined to collapse one way or another.
The truth is that the American middle class is slowly being wiped out and they just can’t afford to pay $300,000, $400,000 or $500,000 for their houses anymore.
Without good jobs, the American people are not going to be able to afford hefty mortgages. Unfortunately, millions upon millions of middle class jobs are being offshored and outsourced every single year and they are not coming back.
There simply will never be a recovery in the housing market without jobs. But in the new global economy, American workers have been put in direct competition with the cheapest labor in the world. It doesn’t take a genius to figure out that jobs are going to be taken away from American workers and given to people who are willing to work for less than ten percent as much.
So, no, the housing market is never going to fully recover. Things got dramatically out of balance over the past couple of decades, and the housing market is going to try to restore that balance regardless of what the U.S. government does.
The U.S. government can continue to throw billions (or even trillions) of dollars at the problem, but in the end the underlying economic fundamentals are simply not going to be denied.
 Prior to the financial crisis of 2007 and 2008, the Federal Reserve could always count on being able to stimulate the U.S. economy with a quick cut to interest rates. But now with interest rates just barely above zero, the Federal Reserve is searching for other ways to pump life into a U.S. economy that is staggering about like a drunken college student. One of the ways that the Federal Reserve can do this is through something called “quantitative easing”. In essence, what happens is that the Federal Reserve creates money out of thin air and starts buying things like U.S. Treasuries, mortgage-backed securities and corporate debt. But many economic analysts are now warning that further rounds of quantitative easing by the Federal Reserve could end up setting off a series of events that could ultimately unleash economic hell. In fact, there are quite a few high profile commentators who now believe that hyperinflation in the United States is absolutely inevitable.
For those not familiar with quantitative easing, Wikipedia has a pretty good definition….
The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.[citation needed] A central bank does this by first crediting its own account with money it has created ex nihilo (“out of nothing”).[1] It then purchases financial assets, including government bonds, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations.
But is it really a good idea for a privately-owned central bank to have the power to create money out of nothing and to do whatever it wants with it outside of U.S. government control?
Of course not, but we dealt with those issues in another article.
What we will concern ourselves with in this article are the negative effects that could be unleashed as the Federal Reserve further abuses this power.
Now keep in mind that disasters don’t usually happen overnight. They usually build over time. When the Federal Reserve begins new rounds of quantitative easing, it will take time for the effects to be felt.
And so far, the new quantitative easing measures that the Federal Reserve has implemented have been relatively mild….
*The Federal Reserve has announced that it will “continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature”.
*The Federal Reserve has also announced that it has decided to reinvest principal payments on mortgage holdings into U.S. Treasury securities.
*The Federal Reserve Bank of New York announced on Wednesday that it will purchase $18 billion in U.S. Treasury securities between now and mid-September.
But most analysts are expecting quantitative easing by the Fed to accelerate – especially if the U.S. economy continues to flounder.
So is there a reason we should be concerned about all of this?
Well, yes there is.
Marc Faber, the author of “The Gloom, Boom and Doom Report”, recently warned CNBC that all of this intervention by the Federal Reserve is going to create a “final crisis” that will destroy the U.S. financial system….
“Investors should have listened to me already six months ago when I wrote that the Fed will continue to monetize … they will print and print and print until the final crisis wipes out the whole system.”
In a recent article, Bob Chapman of the International Forecaster described some of the financial gymnastics that our “financial authorities” go through just to keep the current shell game going….
But first, we ignore things like monthly hundred billion plus mathematical discrepancies between the amount of the government’s deficits and the amount of treasury bonds being sold. Then we give the proceeds from the bogus excess treasury sales to foreign countries, foreign central banks and sovereign wealth funds as well as Cayman Island hedge funds so they can do what with it? Why, so they can buy US treasury paper and agency paper, among other things. Yep, we set up the straw men, fund them with counterfeit money illegally created out of thin air beyond what is needed to fund the ever-increasing deficit being created by the drunken sailors running the US government, and we then magically create categories of new mega-buyers in our financial reports to show everyone how our treasury paper is just as “beloved” as in the old days. Why, even the totally bankrupt UK has magically created $180 billion for the express purpose of buying up those treasuries to keep the whole rip-off party going.
What a mess they have created.
Things have gotten so bad that even CNN is publishing articles that openly acknowledge the crisis. In a recent article on CNN entitled “Is This Finally The Economic Collapse?”, Keith R. McCullough warned that the Federal Reserve openly buying large amounts of U.S. government debt is a very dangerous threshold to cross….
Now that the US can’t cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing — buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It’s a point from which it’s almost impossible to return.
And that is the crux of the problem – the U.S. government has a debt that is absolutely spiralling out of control. This is a problem that has been building for decades and there simply is no quick fix for it.
But the truth is that it was seen as far back as 1835. In his article for CNN, Keith R. McCullough included a very appropriate quote by Alexis De Tocqueville, the author of Democracy in America….
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
Today, approximately 57% of the U.S. government budget is spent on direct payments to American citizens or is money that is spent on behalf of individual American citizens.
For decades, the “Congress critters” have been bribing the American people (and each other) with massive payouts and have been getting away with it.
But now we are starting to pay the price.
The truth is that the U.S. government has become an expert on wasting money. Most of the folks populating Congress are so incompetent that they should not even be hired to mop the floors of a Dairy Queen, and yet they control how trillions of our tax dollars are spent.
The end result is that we have a financial mess that is absolutely unprecedented.
The U.S. financial system is doomed. The U.S. government and the Federal Reserve will probably end up trying to save it with a massive flood of paper money, and in the end that will likely result in the collapse of the U.S. dollar and hyperinflation.
But hopefully all of that is still a while away yet. For now, the Obama administration and the Federal Reserve are trying to play a very delicate balancing act and are trying to keep this giant house of cards from collapsing.
As incompetent as they are, let’s hope that they can keep things together for at least a while longer, because when things really fall apart we are all going to be feeling the pain.
 Millions of Americans are waking up to the fact that the Federal Reserve is bad, but very few of them can coherently explain why this is true. For decades, an unelected, privately-owned central bank has controlled America’s currency, run our economy and has driven the U.S. government to the brink of bankruptcy. It operates in great secrecy, it has never been subjected to a comprehensive audit and yet the actions it takes have an impact on every single American. It is an institution designed to drain wealth from the U.S. government (and ultimately from the American people) and transfer it to the ultra-wealthy. Have you ever wondered why a sovereign nation such as the United States has to borrow United States dollars from anyone? Have you ever wondered why a sovereign nation such as the United States does not even issue its own currency? Have you ever wondered why we allow a group of unelected private bankers to run our economy?
Those are some very important questions. Hopefully what you are about to read will open the eyes of many. The truth is that our financial system is centrally-controlled and centrally-managed by a group of banking oligarchs who have constructed an ever-expanding debt spiral which has been efficiently designed to slowly transfer all wealth into their hands.
The following are 11 reasons why the Federal Reserve is not good for the United States….
1 – The Federal Reserve was created as a way to enslave the U.S. government with debt. The truth is that the U.S. government only goes into debt if it chooses to. Theoretically, one day that U.S. government could simply decide to print as many U.S. dollars as it wants and pay off all government debts. But under the current system that is not allowed. You see, today the U.S. government does not issue any money. The Federal Reserve issues all money. That is why they are called “Federal Reserve notes”.
Under the current regime, whenever the U.S. government wants more currency to be created it has to go into more debt.
In a previous article entitled “It Is Now Mathematically Impossible To Pay Off The U.S. National Debt” I explained how this insidious system works….
If you will pull a dollar bill out and take a look at it, you will notice that it says “Federal Reserve Note” at the top.
It belongs to the Federal Reserve.
The U.S. government cannot simply go out and create new money whenever it wants under our current system.
Instead, it must get it from the Federal Reserve.
So, when the U.S. government needs to borrow more money (which happens a lot these days) it goes over to the Federal Reserve and asks them for some more green pieces of paper called Federal Reserve Notes.
The Federal Reserve swaps these green pieces of paper for pink pieces of paper called U.S. Treasury bonds. The Federal Reserve either sells these U.S. Treasury bonds or they keep the bonds for themselves (which happens a lot these days).
So that is how the U.S. government gets more green pieces of paper called “U.S. dollars” to put into circulation. But by doing so, they get themselves into even more debt which they will owe even more interest on.
So every time the U.S. government does this, the national debt gets even bigger and the interest on that debt gets even bigger.
Now, apologists for the Federal Reserve system are quick to point out that the Federal Reserve does not make much of a profit. Once a “statutory dividend” of 6% is paid to member banks and a capital account surplus is “maintained”, the rest of the profits of the Federal Reserve go back to the U.S. Treasury.
Problem solved, right?
Wrong.
The point is not how much of a profit the Federal Reserve makes or does not make.
The point is that the Federal Reserve is a tool for creating U.S. government debt which slowly drains our national wealth and which ends up greatly enriching the global elite.
As of July 1st, the U.S. government had spent $355 billion so far in 2010 on interest payments to the holders of the national debt.
Have you ever wondered who gets all that money?
The truth is that the wealthiest individuals around the globe have been getting very rich for a very long time off of government debt.
2 – The Federal Reserve creates money out of thin air. In a previous article, I noted how this fact comes out in congressional hearings and yet the American people just don’t seem to get too upset about it….
During a recent Joint Economic Committee hearing on Capital Hill, U.S. Representative Ron Paul directly confronted Federal Reserve Chairman Ben Bernanke about this 1.3 trillion dollars. As Ron Paul described how this 1.3 trillion was just created out of thin air, all Bernanke could do was nod his head. Why? Because it was the truth.
3– The huge predator megabanks that now dominate the U.S. banking system use the Federal Reserve as a tool to make money. One of the ways they do this is called the U.S. Treasury carry trade. What happens is that the Federal Reserve lends huge amounts of money to the megabanks for next to nothing, and then these megabanks use all that cash to buy U.S. government debt. This little “trick” helped enable four of the biggest U.S. banks (Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup) to have a “perfect quarter” with zero days of trading losses during the first quarter of 2010. Wouldn’t you like to have a perfect batting average?
4 – The Federal Reserve devalues our currency. Since the Federal Reserve was created in 1913, the U.S. dollar has lost 96 percent of its purchasing power. The truth is that just a two percent inflation rate will wipe out half of your purchasing power within a single generation. In the chart below, you can clearly see that the beginning of the rapid rise of inflation in the United States coincided with the creation of the Federal Reserve….
5 – The Federal Reserve manipulates the U.S. economy by setting national interest rates. By keeping rates high or low, the Federal Reserve has the power to create economic growth or to destroy it. They have the power to inflate massive bubbles and to pop them. Most Americans give way too much credit and blame to presidents like Bush or Obama for how the economy is doing. The truth is that they really don’t have that much control over the economy compared to the Federal Reserve.
6 – The Federal Reserve also controls the national money supply. They can pump trillions into the economy or pull trillions out without being accountable to anyone. This can have disastrous consequences. For example, after the U.S. stock market crash of 1929, the Federal Reserve continued to contract the money supply. Many analysts believe that this was one of the key things that precipitated the Great Depression.
7– The Federal Reserve is not part of the U.S. government. The truth is that the Federal Reserve is about as “federal” as Federal Express is. In defending itself against a Bloomberg request for information under the Freedom of Information Act, the Federal Reserve objected by declaring that it was “not an agency” of the U.S. government and therefore it was not subject to the Freedom of Information Act. It is kind of funny how Fed officials are always talking about how important their “independence” is, but whenever anyone starts criticizing them for being private they start stressing their ties with the government.
8 – The Federal Reserve has become far, far too powerful. The reality is that those running the Federal Reserve are not elected and yet have an enormous amount of control. In fact, Ron Paul recently told MSNBC that he believes that the Federal Reserve is more powerful than Congress…..
“The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress.”
9– The Federal Reserve is dominated by Wall Street and the New York banks. The New York representative is the only permanent member of the Federal Open Market Committee, while other regional banks rotate in 2 and 3 year intervals. The former head of the New York Fed, Timothy Geithner, is now U.S. Treasury Secretary. The truth is that the Federal Reserve Bank of New York has always been the most important of the regional Fed banks by far, and in turn the Federal Reserve Bank of New York has always been dominated by Wall Street and the major New York banks.
10– Federal Reserve Chairman Ben Bernanke wants to completely eliminate minimum reserve requirements for banks. Fractional reserve banking has always been a way that the bankers have conned the public, but now Bernanke wants to get rid of the pretense of “reserves” altogether.
It is almost too bizarre to believe, but it is right there in black and white on the Federal Reserve’s own website….
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
11 – The Federal Reserve is not accountable to anyone. The Federal Reserve has never undergone a true comprehensive audit since it was created back in 1913. Ron Paul’s proposal to audit the Federal Reserve, which had previously been co-sponsored by 320 members of the U.S. House of Representatives, ultimately failed by a vote of 229-198.
But shouldn’t the American people be able to see what is going on inside the Federal Reserve?
Shouldn’t we have some way to keep them accountable?
After all, they have an incredible amount of power over us, shouldn’t we have at least a little bit of power over them?
Unfortunately, the truth is that they desperately do not want light to be shined on the elaborate “shell game” that they are running.
Have you ever wondered if it was just a coincidence that the personal income tax was implemented just about the same time that the Federal Reserve was created?
Why does the U.S. government have to tax us?
Why can’t the U.S. government just print up all the money that it needs?
Well, the way that our Congress spends money that would probably create horrific hyperinflation, but that is the subject for another article.
The point is that the U.S. government should not have to get U.S. dollars from someone else.
If you take a few minutes to stop and think about it, an America where there is no Federal Reserve, no personal income tax and no IRS is not that hard to imagine.
If the U.S. government functioned just fine without all of them at one time, then why couldn’t the U.S. government function just fine without all of them now?
The system we have now clearly is not working. The Federal Reserve was supposed to guarantee that our financial system would be perfectly stable, but in reality our financial system has become much more unstable.
It is time for different thinking. It is time for the U.S. government to take back control of our currency and of our economy. It is time to start electing some people with common sense to represent us in Washington.
So what do you think of the Federal Reserve? Feel free to leave a comment with your opinion….
 Have you ever noticed how almost all U.S. bank closings are now announced over the weekend? It is almost as if someone wants to keep the increasing number of bank closures out of the news cycle as much as possible. The Obama administration continues to use phrases like “green shoots” and “economic recovery”, but the truth is that the U.S. banking system is in the middle of a meltdown. On Friday, federal regulators shut down 7 more banks. That means that the total number of U.S. bank failures has reached 103 for 2010 so far. Last year (which was a really bad year for bank closings), we did not break 100 until October. Of course federal officials promise that “the worst is almost over”, but can we really trust anything that they tell us at this point?
When it comes to the health of the U.S. banking system, the statistical trends certainly do not look promising.
At the end of 2008, there were 252 U.S. banks on the FDIC’s problem list.
At the end of 2009, there were 702 U.S. banks on the FDIC’s problem list.
About halfway through 2010, FDIC Chairman Sheila Bair said that 775 banks (approximately 10% of all U.S. banks) were on the problem list.
Does anyone else notice a trend developing?
It is time for everyone in the financial world to admit that the U.S. banking system is dying.
Do you know if your bank if on the problem list?
You might want to go check.
Not that your money is going to suddenly disappear.
Even if your local bank fails, the FDIC will guarantee your bank account, right?
Yes, it will.
But the FDIC is far from healthy at this point.
The FDIC is backing approximately 8,000 U.S. banks that have a total of about $13 trillion in assets with a deposit insurance fund that is pretty close to empty.
Well, actually “empty” is not quite the right word.
It was recently reported that the FDIC’s deposit insurance fund is sitting at negative 20.7 billion dollars.
And the FDIC estimates that the seven bank failures on Friday will reduce the fund by another $431 million.
Ouch.
The truth is that the FDIC is rapidly turning into a gigantic financial black hole.
The red ink just seems to be endless.
The FDIC now estimates that their funds will experience a $60 billion reduction due to additional bank closings between now and 2014.
And to be honest, that figure is way too optimistic.
So who is going to bail the FDIC out?
The same source that bails everyone out.
The U.S. taxpayers.
But isn’t that bad?
Yes, all of these bailouts are going to cause the U.S. national debt to continue to explode, but what else can we do?
Are we just going to shut down the FDIC?
That wouldn’t go over too well with anyone.
No, the truth is that this is the system that we have built.
All the crap flows downhill and ultimately ends up in the laps of U.S. taxpayers.
The bad news is that it looks like large numbers of banks are going to continue to fail.
You see, right now the American people are simply not doing a very good job of paying their bills.
During the first quarter of 2010, the total number of loans at U.S. banks that were at least three months past due increased for the 16th consecutive quarter.
Just think about that for a moment.
Would you consider 16 in a row to be a trend?
In an economic system built on credit, it is absolutely imperative that most people pay their debts or the whole thing will come crashing down very quickly.
And right now it is undeniable that things are unraveling at a staggering pace.
So who is benefiting from all this?
Well, there is one segment of the banking industry that is actually performing quite nicely in the midst of all of this chaos.
Many of the largest banks in the U.S. have been reporting very large profits as they gobble up larger and larger shares of the U.S. banking market.
In a previous article entitled “Are We About To Witness The Greatest Banking Consolidation In U.S. History?”, we noted the rapidly growing power of America’s megabanks….
Back in 2000, the “Big Four” U.S. banks – Citigroup, JPMorgan Chase, Bank of America and Wells Fargo – held approximately 22 percent of all deposits in FDIC-insured institutions. As of June 30th of last year that figure was up to 39 percent.
The Founding Fathers of this country warned us of the danger of big banks getting too much power, but we have not listened to their warnings.
Now we have monolithic global banks that are so immense in size that we seem almost powerless to control them.
In fact, the six biggest banks in the United States (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assets equivalent to 60 percent of America’s gross national product.
The truth is that these sharks aren’t shedding any tears when your local banks die off.
Why?
Because they know that many of the customers from the banks that have died will soon come their way.
The reality is that all of the legislation and regulations implemented during the past 30 or 40 years have rigged the game massively in favor of the big global banks.
So dozens upon dozens of smaller banks are going to continue to die and the megabanks are going to continue to eat up increasingly larger portions of market share.
So if you still have money in a small local bank, enjoy it while you can.
From now on, the small bank in America is an endangered species.
 Over the past several decades, one of the primary engines of U.S. economic prosperity has been a constantly expanding debt spiral. As long as the U.S. government, state governments, businesses and American consumers could all continue to borrow increasingly large amounts of money, the economy was going to continue to grow and “the greatest party on earth” could continue. But many of us knew that if anything ever came along and significantly interrupted that debt spiral, it could cause a credit crunch even more severe than we saw at the beginning of the Great Depression back in the 1930s. You see, back in the “roaring 20s”, American businesses and consumers had leveraged themselves like never before. Debt soared to record levels and when the credit spigot was suddenly turned off the whole thing came crashing down and it took an entire decade and a world war to recover. Well, today things are frighteningly similar. Over the past 30 years we have piled up unprecedented mountains of debt. In fact, today our entire economic system is based on debt. So what would a credit crunch do to an economy based on debt? Well, it would absolutely devastate it of course. So are we facing a credit crunch in 2010? Yes. Consumer credit in the United States has already contracted during 15 of the past 16 months, and there is every indication that things are about to get even worse.
The truth is that once a deflationary cycle starts, it tends to feed on itself. People quit spending money, banks quit making loans and everyone starts hoarding cash.
And right now there is a lot of fear out there. According to one major indicator, consumer sentiment declined in early July to its lowest in 11 months.
U.S. consumers are starting to pay down debt and are holding on to their money. Others can’t spend more money because they are out of work or are completely tapped out.
But without more spending, the U.S. economy won’t get revved up again. And if the U.S. economy does not get going soon, there are going to be more foreclosures, more bankruptcies and even more jobs lost.
In a recent article for The Telegraph, Ambrose Evans-Pritchard set out some of the statistics that show that the U.S. economy is in really, really bad shape right now….
The US workforce has shrunk by a 1m over the past two months as discouraged jobless give up the hunt. Retail sales have fallen for the past two months. New homes sales crashed to 300,000 in May after tax credits ran out, the lowest since records began in 1963. Mortgage applications have fallen by 42pc to 13-year low since April. Paul Dales at Capital Economics said the “shadow inventory” of unsold properties has risen to 7.8m. “The double dip in housing has begun,” he said.
It seems like almost everyone is using the words “double dip” these days.
It is almost as if it was already a foregone conclusion.
But the truth is that this would have just been one long economic decline if the U.S. government (and many of the other governments around the globe) had not pumped so much “stimulus” into their economies over the past several years.
Now that governments around the world are pulling back and are beginning to implement austerity measures, the “sugar rush” of the stimulus money is wearing off and the original economic decline is resuming.
All that the trillions in “stimulus” did was to give the world economy a temporary boost and get us into a whole lot more debt.
In his recent article entitled “The U.S. Is On The Edge Of A Growing Deflationary Sinkhole”, Lorimer Wilson did a really good job of detailing how all of this debt has gotten us into a complete and total mess….
Capitalism cannot function unless its constantly compounding debt is serviced and/or paid down. Today, the U.S., the world’s largest debtor, can no longer pay what it owes except by rolling its debt forward and borrowing more [in] what the late economist Hyman Minsky called ponzi-financing, financing common in the final stages of mature capital systems.
The amount of outstanding U.S. debt, according to Martin D. Weiss, www.moneyandmarkets.com, has now reached levels that can never be paid off. The United States government and its agencies have, by far,
– the largest pile-up of interest-bearing debts ($15.6 trillion),
– the largest accumulation of unsecured obligations (over $60 trillion),
– the largest yearly deficit ($1.6 trillion), and
– the greatest indebtedness to the rest of the world ($4.8 trillion).
The truth is that the United States is in the early stages of a truly historic financial implosion.
Earlier this year, all of the focus was on the European sovereign debt crisis, but now all eyes are turning back to the U.S. once again. David Bloom, currency chief at HSBC, recently remarked that world financial markets are extremely concerned about the state of the U.S. economy right now….
“We’re in a world of rotating sovereign crises. The market seems to become obsessed with one idea at a time, then violently swings towards another. People thought the euro would break-up. Now we’re moving into a new phase because we’re hearing alarm bells of a US double dip.”
Without direct intervention from the U.S. government, the U.S. financial system is headed for a world of hurt.
The truth is that the credit markets are freezing up, and without efficiently operating credit markets, the economic system we have constructed simply will not work.
The following information comes courtesy of the Consumer Metrics Institute. If you have never visited their site, you should, because it is packed full of excellent data. In their most recent report, they do a good job of detailing the astounding credit contraction that we have been witnessing….
During the past week there has been a flurry of Federal Reserve reports and commentary concerning the levels of credit in the current economy. The two most notable were:
► On July 8th they reported that the level of seasonally adjusted outstanding U.S. Consumer Credit (their G.19 report) decreased during May by $9.1 billion, representing an annualized rate of credit contraction of 4.5%. Although even this change is above the average for the preceding twelve months, it is much smaller than a quiet revision to the previously published April U.S. Consumer Credit figure — which is now reported to have decreased by $14.9 billion (a 7.3% annualized contraction rate).
The Federal Reserve fails to put these numbers into perspective:
1) Consumer credit has contracted during 15 of the past 16 reported months, and it is down a record total $148 billion over that time span.
2) The $14.9 billion in credit ‘lost’ during just April is the second highest monthly amount in history, second only to the $23.4 billion ‘lost’ during November, 2009.
3) And the nearly 6% cumulative reduction in consumer credit over the past 16 months is the largest (on a percentage basis) for any 16 month span since September 1944 — when FDR was still in the White House and people were buying War Bonds instead of tightly rationed consumer goods.
► On July 12th Federal Reserve Chairman Ben Bernanke noted that small businesses were not getting the loans that they need to create new jobs. The Federal Reserve’s own data reports that lending to small businesses dropped to below $670 billion in Q1 2010, down about $40 billion (5.6%) from two years ago.
The New York Times reported Mr. Bernanke wondered: “How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability? No doubt all three factors have played a role.”
Small businesses, which account for over 60% of gross job creation, are not – for whatever reason – tapping into the credit necessary to create those jobs.
If you know anything about economics, the excerpt that you just read should be chilling you to your bones right about now.
Without loans, businesses can’t start or expand, consumers cannot buy homes or vehicles and retail spending will be in the toilet.
But, as a recent USA Today article pointed out, part of the problem is that so many Americans now have very, very low credit scores….
Figures provided by FICO show that 25.5% of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It’s unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.
As I recently pointed out on The American Dream blog, historically only about 15 percent of Americans have had credit scores that low.
So can the U.S. economy fully recover if the number of Americans that are a bad credit risk has nearly doubled?
That is a very good question.
As I noted in a previous article, the truth is that the retail sector is already a huge mess, and if we don’t get the American people pulling out their credit cards soon this holiday season may not be very jolly at all….
Vacancies and lease rates at U.S. shopping centers continued to get even worse during the second quarter of 2010. In fact, in some of the most depressed areas of the United States, many malls and shopping centers could end up looking like ghost towns by the time Christmas rolls around.
So this is the point where Barack Obama comes riding in on his white horse and rescues the U.S. economy, right?
Well, at this point Obama has joined with the other G20 leaders in pledging to get government spending under control.
So right now there are not any plans for new stimulus packages.
But as the U.S. economy starts sinking into a deflationary depression, the temptation to pump up the economy with even more government spending will become too great.
This will especially be true the closer to the election of 2012 that we get. By the time election season rolls around, Obama will likely be much more willing to pile up even more debt for a short-term economic boost.
So yes, we are headed for a complete and total economic nightmare, but exactly how it all plays out is going to depend a lot on what Barack Obama, the Federal Reserve, other world leaders and other central banks decide to do.
For the moment, we are heading for an absolutely brutal credit crunch, and if something is not done quickly, it is going to dramatically slow down the world economy.
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