The central banks of the world are acting as if it is 2008 all over again. Desperate times call for desperate measures, and right now the central bankers are pulling out all the stops. The Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, the Bank of Japan and the Swiss National Bank have announced a coordinated plan to provide liquidity support to the global financial system. According to the plan, the Federal Reserve is going to substantially reduce the interest rate that it charges the European Central Bank to borrow dollars. In turn, that will enable the ECB to lend dollars to European banks at a much cheaper rate. The hope is that this will alleviate the credit crunch which has gripped the European financial system by the throat. So where is the Federal Reserve going to get all of these dollars that it will be loaning out at very low interest rates? You guessed it – the Fed is just going to create them out of thin air. Our currency is being debased so that Europe can be helped out. Unfortunately, the impact of this move will be mostly “psychological” because it really does nothing to address the fundamental problems that Europe is facing. It is up to Europe to solve those problems, and so far Europe has shown no signs of being able to do that.
The major central banks of the world say that they want to “enhance their capacity to provide liquidity support to the global financial system.” But essentially what is happening is that the Federal Reserve is going to be zapping large amounts of dollars into existence and loaning them out to the ECB very, very cheaply. Think of it as a type of “quantitative easing” on a global scale.
The decision to do this was reportedly made by the Federal Reserve on Monday morning. For the moment, this move seems to have stabilized the European financial system. It is quite unlikely that any major European banks will fail this weekend now.
But as mentioned above, this move does nothing to solve the very serious financial problems that Europe is facing. This intervention by the central banks is merely just a speed bump on the road to financial oblivion.
Most Americans are not going to understand what the central banks of the world just did, but it really is not that complicated.
The following is how CNN chief business correspondent Ali Velshi broke down what the central banks have done….
In an attempt to stave off the consequences of a global credit freeze, the Federal Reserve, in coordination with major central banks, has created a credit line available to those central banks, whereby they can borrow dollars at reduced interest rates for periods of three months. The central banks, in turn, can lend to commercial banks in their respective countries. This is meant to reduce the cost of short-term borrowing for troubled European banks and to give them immediate access to dollars.
This was done immediately after the collapse of Lehman Brothers as well, to alleviate the consequences of banks being largely unwilling to lend to other banks, even for short periods, for fear that the borrowing banks could fail.
Okay – so the Federal Reserve is loaning giant piles of cheap money to the European Central Bank.
So where in the world does all of that money come from?
As a CNBC article recently explained, all of this money is created right out of thin air by the Federal Reserve….
Neither the dollars nor the Euros come from anywhere. They aren’t moved or debited from anywhere. They are invented right on the spot with a few taps on the key pad. And that’s all. There’s no printing press fired up to make new dollars or euros.
This is sometimes called “fiat money.” But that makes it sound as if some command from a sovereign created the money. It’s really closer to “keyboard money,” since it is created by data entry in a computer.
Does that sound bizarre to you?
But that is how the global financial system really works.
We live in a crazy world.
So what did the financial markets of the world think of this move by the Federal Reserve?
It turns out that they absolutely loved it.
The Dow was up 490 points, and that was the biggest gain of the year so far.
Unfortunately, this stock market rally is not going to last indefinitely. If you are still in the market, enjoy this while you can because eventually a whole lot of pain is going to be coming.
Again, nothing has been solved. Europe is still in a massive amount of trouble. But the announcement did make everyone feel all “warm and fuzzy” for at least a day.
Michelle Girard, a senior economist at RBS Securities, said the following about this move….
“The impact is more psychological than anything else”
Just think of it as “comfort food” for the financial markets.
It was also a very desperate move.
In fact, some even believe that this move happened because a major European bank was in danger of failing.
Just check out some of the things that Jim Cramer of CNBC has been saying on Twitter….
If the Fed didn’t act we would have had the largest bank failure ever this weekend, i believe.
The actions the governments took today shows that there was without a doubt a major bank about to fall this weekend. That’s very dire….
I believe a major European bank would have gone under this weekend…. That’s why they did this….
An article in Forbes has also speculated that this move was made because a major European bank was in imminent danger of failing….
Did a big European bank come close to failing last night? European banks, especially French banks, rely heavily on funding in the wholesale money markets. Given the actions of the world’s largest central banks last night, it raises the question of whether a major bank was having difficulty funding its immediate liquidity needs.
Perhaps we will never know the truth, but the reality is that the Federal Reserve and the European Central Bank would have never taken coordinated action like this if they did not believe that there was some sort of imminent threat to the global financial system.
Sadly, this latest move is also going to have some side effects.
Pimco senior vice president Tony Crescenzi says that all of this “liquidity” is going to dramatically increase the size of the U.S. monetary base….
Keep in mind that any use of the Fed’s swap facility expands the Fed’s monetary base: all dollars, no matter where they are deposited, whether it be Kazakhstan, Japan, or Mexico, wind up back in an American bank. This means that any time a foreign central bank engages in a swap with the Federal Reserve, the Fed will create new money in order to make the swap. Use of the Fed’s liquidity swap line in late 2008 was the main cause of a surge in the Fed’s monetary base at that time. The peak for the swap line was about $600 billion in December 2008. Some observers will therefore say that the swap line is a backdoor way to engage in more quantitative easing.
When there is more money floating around out there but the same amount of goods and services, prices go up.
So will we eventually see more inflation in the United States because of all this?
That is what some are fearing.
Meanwhile, politicians in Europe have failed to come up with a plan to address the European financial crisis once again.
They are calling it a “delay”, but the truth is that it should be called a “failure”. The following comes from an article in USA Today….
The ministers delayed action on major financial issues — such as the concept of a closer fiscal union that would guarantee more budgetary discipline — until the heads of state meet next week in Brussels.
So will European politicians come up with a real plan next week in Brussels?
That seems unlikely.
The reality is that this latest move by the major central banks of the world does not change the fact that Europe is in a huge amount of trouble and is most likely headed for a very painful financial collapse.
One more thing that this latest move by the central banks of the world highlights is the fact that we do not have any control over what they do.
All of these central banks are run by unelected bureaucrats that answer to nobody. The decisions that these central bankers make affect all of our lives in a very significant way, and yet we have zero input into these decisions.
Most of the decisions that these central bankers make seem to benefit big banks and big financial institutions. They always claim that the benefits will “filter down” to the rest of us. But most of the time what ends up filtering down to us is the economic pain that comes from their bad decisions.
As I have written about so many times before, these central banks need to be abolished. The American people need to tell Congress to shut down the Federal Reserve and to start issuing debt-free United States currency.
We do not want a bunch of unelected central bankers to “centrally plan” the U.S. economy or to “centrally plan” the global economy.
The more these central bankers monkey with things, the more they mess things up.
Yes, this latest move has stabilized things for the moment, but big trouble is on the horizon for the global financial system.
Count on it.
What we are all watching unfold right now is a complete and total financial nightmare for Italy. Italian bond yields are soaring to incredibly dangerous levels, and now the yield curve for Italian bonds is turning upside down. So what does that mean? Normally, government debt securities that have a longer maturity pay a higher interest rate. There is typically more risk when you hold a bond for an extended period of time, so investors normally demand a higher return for holding debt over longer time periods. But when investors feel as though a major economic downturn or a substantial financial crisis is coming, the yield on short-term bonds will often rise above the yield for long-term bonds. This happened to Greece, to Ireland and to Portugal and all three of them ended up needing bailouts. Now it is happening to Italy and Spain may follow shortly, but the EU cannot afford to bail out either of them. An inverted yield curve is a major red flag. Unfortunately, there does not seem to be much hope that there is going to be a solution to this European debt crisis any time soon.
We are witnessing a crisis of confidence in the European financial system. All over Europe bond yields went soaring today. When I finished my article about the financial crisis in Italy on Tuesday night, the yield on 10 year Italian bonds was at 6.7 percent. I awoke today to learn that it had risen to 7.2 percent.
But even more importantly, the yield on 5 year Italian bonds is now sitting at about 7.5 percent, and the yield on 2 year Italian bonds is about 7.2 percent.
The yield curve for Italian bonds is in the process of turning upside down.
If you want to see a frightening chart, just look at this chart that shows what has happened to 2 year Italian bonds recently.
Do phrases like “heading straight up” and “going through the roof” come to mind?
This comes despite rampant Italian bond buying by the European Central Bank. CNBC is reporting that the European Central Bank was aggressively buying up 2 year Italian bonds and 10 year Italian bonds on Wednesday.
So what does it say when even open market manipulation by the European Central Bank is not working?
Of course some in the financial community are saying that the European Central Bank is not going far enough. Some prominent financial professionals are even calling on the European Central Bank to buy up a trillion euros worth of European bonds in order to soothe the markets.
Part of the reason why Italian bond yields rose so much on Wednesday was that London clearing house LCH Clearnet raised margin requirements on Italian government bonds.
But that doesn’t explain why bond yields all over Europe were soaring.
The reality is that bond yields for Spain, Belgium, Austria and France also skyrocketed on Wednesday.
This is a crisis that is rapidly engulfing all of Europe.
But at this point, bond yields in Europe are still way too low. European leaders shattered confidence when they announced that they were going to ask private Greek bondholders to take a 50% haircut. So now rational investors have got to be asking themselves why they would want to hold any sovereign European debt at all.
There is no way in the world that any rational investor should invest in European bonds at these levels.
Are you kidding me?
If there is a very good chance that private bondholders will be forced to take huge haircuts on these bonds at some point in the future then they should be demanding much, much higher returns than this.
But if bond yields continue to go up in Europe, we are going to quickly come to a moment of very great crisis.
The following is what Rod Smyth of Riverfront Investment Group recently told his clients about the situation that is unfolding in Italy….
“In our view, 7% is a ‘tipping point’ for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance”
Other analysts are speaking of a “point of no return”. For example, check out what a report that was just released by Barclays Capital had to say….
“At this point, Italy may be beyond the point of no return. While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented.”
But unlike Greece, Ireland and Portugal, the EU simply cannot afford to bail out Italy.
Italy’s national debt is approximately 2.7 times larger than the national debts of Greece, Ireland and Portugal put together.
Plus, as I noted earlier, Spain is heading down the exact same road as Italy.
Europe has simply piled up way, way too much debt and now they are going to pay the price.
Global financial markets are very nervous right now. You can almost smell the panic in the air. As a CNBC article posted on Wednesday noted, one prominent think tank actually believes that there is a 65 percent chance that we will see a “banking crisis” by the end of November….
“There is a 65 percent chance of a banking crisis between November 23-26 following a Greek default and a run on the Italian banking system, according to analysts at Exclusive Analysis, a research firm that focuses on global risks.”
Personally, I believe that particular think tank is being way too pessimistic, but this just shows how much fear is out there right now.
It seems more likely to me that the European debt crisis will really unravel once we get into 2012. And when it does, it just won’t be a few countries that feel the pain.
For example, when Italy goes down many of their neighbors will be in a massive amount of trouble as well. As you can see from this chart, France has massive exposure to Italian debt.
Just like we saw a few years ago, a financial crisis can be very much like a game of dominoes. Once the financial dominoes start tumbling, it will be hard to predict where the damage will end.
Some believe that what is coming is going to be even worse than the financial nightmare of a few years ago. For example, the following is what renowned investor Jim Rogers recently told CNBC….
“In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still – be careful”
Rogers says that the reason the next crisis is going to be so bad is because debt levels are so much higher than they were back then….
“Last time, America quadrupled its debt. The system is much more extended now, and America cannot quadruple its debt again. Greece cannot double its debt again. The next time around is going to be much worse”
So what is the “endgame” for this crisis?
German Chancellor Angela Merkel is saying that fundamental changes are needed….
“It is time for a breakthrough to a new Europe”
So what kind of a “breakthrough” is she talking about? Well, Merkel says that the ultimate solution to this crisis is going to require even tighter integration for Europe….
“That will mean more Europe, not less Europe”
As I have written about previously, the political and financial elite of Europe are not going to give up on the EU because of a few bumps in the road. In fact, at some point they are likely to propose a “United States of Europe” as the ultimate solution to this crisis.
But being more like the United States is not necessarily a solution to anything.
The U.S. is 15 trillion dollars in debt and extreme poverty is spreading like wildfire in this nation.
No, the real problem is government debt and the central banks of the western world which act as perpetual debt machines.
By not objecting to central banks and demanding change, those of us living in the western world have allowed ourselves to become enslaved to gigantic mountains of debt. Unless something dramatically changes, our children and our grandchildren will suffer under the weight of this debt for as long as they live.
Don’t we owe future generations something better than this?
Did you see Ben Bernanke’s testimony before the House Budget Committee on Wednesday? It was quite a show. Bernanke seems to believe that if he just keeps on repeating the same mantras over and over that somehow they will become true. Bernanke insists that the economy is getting much better, that quantitative easing will lower long-term interest rates, that all of this money printing by the Federal Reserve is not causing inflation and that the Fed knows exactly what needs to be done to dramatically reduce unemployment inside the United States. So is anyone out there still actually buying what Bernanke is selling? Sure, a handful of people in the mainstream media still have complete faith in Bernanke. But for the rest of us, it is becoming increasingly clear that there is something really “off” about Bernanke. So just what is going on with him? Is he lying to all of us on purpose? Could he be insane? Is he just completely and totally incompetent?
Bernanke’s track record of failure is absolutely stunning. Before discussing some of his most recent comments, let’s review some of the pearls of wisdom that Bernanke has shared with us in recent years….
2005: “House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.”
2005: “We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”
2006: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”
2007: “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”
2007: “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”
2008: “The Federal Reserve is not currently forecasting a recession.”
So should we believe anything that Bernanke is saying now?
Of course not.
Obviously Bernanke has been feeding us all a whole bunch of nonsense for a very long time.
So what conclusion should we come to about Bernanke at this point?
Well, as I see it, there are three primary alternatives….
1 – Bernanke knows that what he is telling us is wrong and he is purposely trying to deceive us. That would make him a liar.
2 – Bernanke actually believes what he is saying because he is completely delusional. That would make him a lunatic.
3– Bernanke actually believes what he is saying because he simply does not understand economics. This would make him completely and totally incompetent.
In any event, someone with Bernanke’s track record should not still have such a high level job. He should have been asked to resign long, long ago.
But instead, Obama nominated him for another term and he was approved by our incompetent Congress.
It is a crazy world in which we live.
So what is Bernanke saying now?
Let’s take a look at some of his main points…..
Bernanke Says That One Of The Main Goals Of Quantitative Easing Is To Reduce Long-Term Interest Rates
During one interview about QE2, Bernanke made the following statement….
“The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.”
In fact, Bernanke elaborated on that point during his remarks on Wednesday….
Conventional monetary policy easing works by lowering market expectations for the future path of short-term interest rates … By comparison, the Federal Reserve’s purchases of longer-term securities do not affect very short-term interest rates, which remain close to zero, but instead put downward pressure directly on longer-term interest rates. With the Fed funds rate at the zero bound, the Fed had to resort to unconventional policy to provide further accommodation.
So how is all that working out?
The yield on 10-year U.S. Treasury notes has risen from 2.49 percent back in November to 3.65 percent at the close of business on Wednesday.
Long-term interest rates were supposed to go down as a result of quantitative easing, but instead they have increased substantially.
Looks like Bernanke was wrong about another one.
Bernanke Says That Quantitative Easing Is Not Going To Cause Inflation
The price of wheat has roughly doubled since last summer, the price of corn has roughly doubled since last summer and the price of oil is marching up towards $100 a barrel.
But oh, there is no inflation so there is no need to worry according to Bernanke.
Food riots are breaking out around the globe, but Bernanke says that the inflation in those countries is being caused by their own central banks.
Bernanke says that the Federal Reserve has nothing to do with international inflation even though the U.S. dollar is the primary reserve currency of the world.
Bernanke says that even though consumers are seeing huge price increases in the supermarket and at the gas pump that we aren’t really seeing any real inflation because the fraudulent U.S. consumer price index says so.
It is a wonder that anyone still considers this guy to be credible.
Bernanke Says That Quantitative Easing Is Helping The Economy Recover And Is Reducing Unemployment
During his remarks on Wednesday, Bernanke said that the recent decline in the U.S. unemployment rate was “grounds for optimism”.
And, of course, he is glad to take part of the credit for the “recovery”.
Things are getting better?
As I wrote about a few days ago, the “decline” in the U.S. unemployment rate during January to 9.0% is no reason to celebrate.
First of all, the U.S. economy must add 150,000 jobs each month just to keep up with population growth.
During January, the U.S. economy only added 36,000 jobs.
So why did the unemployment rate go down?
Well, the U.S. government said that 504,000 American workers “dropped out of the labor force” in January.
Well, isn’t that convenient.
Let’s just pretend a half million unemployed workers are not even there.
Yeah, that will make the numbers look better!
Sadly, the number of Americans that are “not in the labor force” but that would like a job right now has hit an all-time record high. If you add all of those people into the official unemployment figure it would jump to 12.8%.
The truth is that the employment situation in America is not getting any better. In fact, according to Gallup, the unemployment rate actually increased to 9.8% at the end of January.
Perhaps Bernanke should reconsider how much “better” things are really getting.
Bernanke Says That Now Is Not The Time To Reduce The Deficit
When it comes to the national debt, Ben Bernanke is constantly talking out of both sides of his mouth.
Bernanke is constantly saying that the exploding U.S. national debt is very dangerous (and he is very right about that point), but Bernanke also says that now is definitely not the time to do anything about it.
In fact, recently Bernanke has been purposely stepping into the partisan debate about whether to raise the debt ceiling or not.
Bernanke says that Republicans should stand down and that now is not the time to be playing political games with the debt ceiling. Bernanke has been warning that the consequences for not raising the debt ceiling could be catastrophic….
“We do not want to default on our debts. It would be very destructive.”
Over and over Bernanke has been saying that the economic recovery is still fragile and that now is not the time be cutting deeply into the federal budget.
So when is the right time?
Well, with these central bankers it seems like it is never time to address all of this debt. It seems like they always want us to “have a long-term plan” to tackle the debt in the future but to keep borrowing and spending in the present.
Well, it looks like that is exactly what the Obama administration plans to keep doing. This year it is being projected that the U.S. government will have the biggest budget deficit ever recorded – approximately 1.5 trillion dollars.
Keep in mind that the total U.S. national debt did not surpass 1.5 trillion dollars until the mid-1980s.
That means that this year we will accumulate more debt than we did for over the first 200 years that this nation was in existence.
Oh, but according to Bernanke we better not do anything to address our out of control debt because that would “harm the economic recovery”.
In the end, all of this government debt is going to become so monstrous that it is going to swallow us whole. We can try to keep running from it, but we can’t hide. Someday the gigantic debt monster that we have created is going to catch up with us.
So, yes, there are a whole lot of reasons to be really upset with Ben Bernanke.
Perhaps he would be a fun guy to sit down and talk to at a backyard barbecue, but he isn’t the type of person that you would want to entrust with any real responsibility, and he most definitely is not someone that should be running the largest economy in the history of the planet.
Well, it was nice while it lasted. One of the really good things that came out of the recent economic downturn was that millions of American families decided to get out of debt. In particular, we had seen a sustained trend of reduced credit card usage in the United States. It looked like Americans had finally wised up. But we should have known that Americans would not be willing to tighten their belts forever. Unfortunately, it appears that getting out of debt is no longer so “trendy”. In fact, the month of December was the third month in a row in which consumer credit grew in the United States. Prior to that, consumer credit in the United States had declined for 20 months in a row. The American people were doing so, so good. Why did they have to stop? It appears that the American people have fallen off the wagon and have gotten a taste for credit card debt once again. This time, however, the credit card companies are back with interest rates that are higher than ever. In fact, one national credit card company has hundreds of thousands of customers signed up for a card that charges interest rates of up to 59.9%.
You mean there are people that are stupid enough to actually sign up for a credit card that will charge them 59.9% interest?
Unfortunately the answer is yes.
In fact, the top rate was 79.9% before First Premier Bank lowered it.
These cards are targeted at Americans that have a poor credit history, and these days there are a whole lot of those.
A recent story on the website of CNN described how large numbers of U.S. consumers with poor credit are gobbling up credit cards like these. Unfortunately, many of these consumers are also not smart enough to realize what they are getting into. The CNN story contained a quote from a woman who was in complete shock when she discovered that her interest rate was going to go up by 50 percentage points….
“I about had a heart attack when I got a disclosure notice saying that my starting rate of 29.9% was going up to 79.9%.”
First Premier Bank has since lowered the top rate on those cards to 59.9%, but that it still completely outrageous.
Not only are the interest rates on those cards super high, but they also charge a whole bunch of fees on those cards as well. The following are some of the fees that First Premier Bank charges….
*$45 processing fee to open the account
*Annual fee of $30 for the first year
*$45 fee for every subsequent year
*A monthly servicing fee of $6.25
So you would think that nobody in their right mind would ever sign up for such a card, right?
CNN is reporting that almost 700,000 Americans have signed up for the card.
In fact, CNN says that First Premier Bank gets between 200,000 to 300,000 new applications a month for the card, but that they only open about 50,000 new accounts each month.
Are there really this many Americans that are this gullible?
If Americans would just remember the “DBS” rule they would be so much better off.
DBS = Don’t Be Stupid
Do you know how long it would take to pay off a credit card with a 59.9 percent interest rate?
Just a 20 percent interest rate is bad enough.
According to the credit card repayment calculator, if you owe $6000 on a credit card with a 20 percent interest rate and only pay the minimum payment each time, it will take you 54 years to pay off that credit card.
During that time you will pay $26,168 in interest rate charges in addition to the $6000 in principal that you are required to pay back.
The number one piece of financial advice that most of the “financial gurus” give is that you should get out of credit card debt – particularly credit card debt that has a high interest rate.
Unfortunately, 46% of all Americans carry a credit card balance from month to month today.
According to the United States Census Bureau, there are approximately 1.5 billion credit cards in use in the United States.
Of U.S. households that have credit card debt, the average amount owed on credit cards is $15,788.
This is how the bankers enslave us.
We end up paying them 3, 4 or even 5 times as much as we originally borrowed.
Month after month after month we slave away to make them wealthy.
So how do you stop this vicious cycle?
You quit buying stuff that you can’t afford!
Unfortunately, the vast majority of Americans have never received any formal training on how to manage finances.
Most of us were never taught any of this stuff in school. Most of us were totally unprepared when the financial predators started preying on us in college. Most of us got sucked in and spent years and years trapped in credit card debt.
When you carry a balance from month to month you are willingly signing up to become a debt servant to the big banks. They get rich while you suffer.
The sad thing is that the mainstream media is pointing to increased credit card spending as a sign that the U.S. economy is getting back to normal.
But gigantic mountains of debt is what got us into all of this trouble in the first place.
Average household debt in the United States has now reached a level of 136% of average household income.
In China that figure is only 17%.
Obviously, we have a massive, massive problem with debt in this country.
Cranking the debt spiral back up is not going to cause the economy to recover.
Well, the profits of the big banks might recover, but the rest of us will suffer.
If you want to be financially free, then it is time to pay off your credit card debt and get off the debt payment treadmill for good.
The entire global economy is on the verge of collapse, so now is a great time to renounce consumerism. Instead, we need to be preparing ourselves and our families for the hard times that are coming.
So what do you all think about the outrageous interest rates that the credit card companies are charging these days? Feel free to post your thoughts in the comments section below….
Ben Bernanke and the rest of the folks over at the Federal Reserve did not just wake up one day and decide that they wanted to start printing hundreds of billions of dollars out of thin air. The truth is that the economic forces that have brought us to this point have taken decades to develop. In the post-World War 2 era, when the U.S. economy has fallen into a recession, either the Federal Reserve would lower interest rates or the U.S. government would indulge in even more deficit spending to stimulate the economy. But now, as you will see below, both of those alternatives have been exhausted. In addition, we are now rapidly reaching the point where there are simply not enough lenders out there to feed the U.S. government’s voracious appetite for debt. So now the Federal Reserve is openly printing hundreds of billions of dollars that will enable them to finance U.S. government borrowing, and (they hope) stimulate the U.S. economy at the same time. Unfortunately, the rest of the world is not amused. Nations such as China, Japan and many of the oil-exporting nations of the Middle East have accumulated a lot of U.S. dollars and a lot of U.S. Treasuries and they are not pleased that those investments are now being significantly devalued.
So how did we get to this point? Why is the Federal Reserve printing money out of thin air in a desperate attempt to stimulate the economy?
Well, the Federal Reserve has more or less exhausted all of the other tools that it has traditionally used to help the economy during an economic downturn. As you can see from the chart below, the Federal Reserve has lowered interest rates during past recessions. The goal of lowering interest rates is to make it less expensive to borrow money and thus spark more economic activity. Well, as you can see, the Federal Reserve has no place else to go with interest rates. Over the past 30 years, rates have consistently been pushed down, down, down and now they are kissing the floor….
Another way that the U.S. economy has been “stimulated” over the past 30 years is through increased government spending. The theory is that if the government spends more money, that will get more cash into the hands of the people and spark more economic activity. That was the whole idea behind the “economic stimulus packages” that were pushed through Congress. However, increased government spending always comes at a very high cost under our current system. Government debt is now totally out of control. As you can see below, the U.S. national debt has exploded from about one trillion dollars in 1980 to over 13 trillion dollars today. Currently, there is very little appetite in Congress for more government spending to stimulate the economy, especially after the results of the November election.
Most Americans don’t realize it, but much of our incredible “prosperity” over the last 30 years has been fueled by the mountains of debt that we have accumulated. Now U.S. government debt is exploding at an exponential rate….
Sadly, the U.S. government has absolutely no self-control when it comes to spending money. Our politicians are absolutely addicted to debt.
The truth is that the U.S. government just can’t seem to stop wasting money. One of the most comical news stories of the past few days involved the Recovery Independent Advisory Panel, which is a sub-committee of the larger Recovery Accountability and Transparency board. This panel will be holding a meeting on November 22nd to discuss how to prevent “fraud, waste, and abuse” of economic stimulus funds.
So where will this meeting be held?
It is going to be held at the ultra-luxurious Ritz Carlton Hotel in Phoenix, Arizona.
You just can’t make this stuff up.
So if the Federal Reserve cannot stimulate the economy through lower interest rates and the U.S. government cannot stimulate the economy by spending even more money, what does that leave us with?
Unfortunately, that leaves us with either doing nothing or with having the Federal Reserve print money out of thin air and shovel it into the economy.
Sadly, even after months of news headlines about quantitative easing, most Americans still do not understand what it is. The following is a short video that is very humorous but that also does a good job of simply explaining what quantitative easing is and why it is bad for the U.S. economy….
Quantitative Easing Explained
For much more on why quantitative easing is so destructive, please see an article that I previously authored entitled “9 Reasons Why Quantitative Easing Is Bad For The U.S. Economy“. The truth is that in an all-out effort to give the U.S. economy a short-term boost, the Federal Reserve is putting the entire world financial system in peril.
One group of prominent economists was so alarmed by this new round of quantitative easing that they recently wrote an open letter to Ben Bernanke warning of the dangers that flooding the economy with new money could create. The following is an excerpt from the text of that open letter which was also posted on the website of the Wall Street Journal…..
We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.
We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.
The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.
But it isn’t just a few prominent economists that are expressing disapproval for this new round of quantitative easing. The truth is that almost every major industrialized nation has spoken out against all of this money printing by the Fed. Meanwhile, Barack Obama continues to publicly defend Ben Bernanke and this new round of quantitative easing at every opportunity.
That is some “change you can believe in”, eh?
Unfortunately, the danger that quantitative easing poses to our financial system is much greater than most Americans realize.
In order for the world financial system to operate smoothly, the rest of the world much have a great deal of faith in the U.S. dollar and in U.S. Treasuries. Ben Bernanke had promised Congress (and the rest of the globe) that the Federal Reserve would not monetize U.S. government debt and that he was going to keep the U.S. dollar strong. But now Bernanke has broken his promises once again. At this point Bernanke has lost a ton of credibility. Unfortunately, Barack Obama and many of the key members of Congress continue to express unwavering support for him.
The rest of the world can see what is going on. They are not stupid. They are not going to keep pouring hundreds of billions into U.S. Treasuries if the Federal Reserve is going to “cheat” whenever economic conditions get a little tough.
If the day arrives when the rest of the globe completely loses faith in the U.S. dollar and in U.S. Treasuries, it is going to create a complete and total financial disaster – especially for the United States.
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?
Are you ready for rampant inflation? Well, unfortunately it looks like it might be headed our way. The U.S. monetary base has absolutely exploded over the last couple of years, and all that money is starting to filter through into the hands of consumers. Commodity prices are absolutely skyrocketing, and it is inevitable that those price increases will show up in our stores at some point soon. The U.S. dollar has already been slipping substantially, and now there is every indication that the Fed is hungry to start printing even more money. All of these things are going to cause a rise in inflation. Not that we aren’t already seeing inflation in many sectors of the economy. Airline fares for the holiday season are up 20 to 30 percent above last year’s rates. Double-digit increases in health insurance premiums are being reported from coast to coast. The price of food has been quietly sneaking up even at places like Wal-Mart. Meanwhile the U.S. government insists that the rate of inflation is close to zero. Anyone who actually believes the government inflation numbers is living in a fantasy world. The U.S. government has been openly manipulating official inflation numbers for several decades now. But we really haven’t seen anything yet. As increasingly larger amounts of paper money are dumped into the economy, we are eventually going to see the worst inflation in American history. The only real question is how far down the road are we going to get before it happens.
Take a few moments and digest the chart below. It shows just how dramatically the U.S. monetary base has been expanded recently….
Up to this point this dramatic expansion of the U.S. monetary base has not caused that much inflation because U.S. government borrowing has soaked most of it up and U.S. banks have been hoarding cash and have been building up their reserves.
However, this situation will not last forever. Eventually all this cash will make its way through the food chain and into the hands of U.S. consumers.
But what is even more troubling is the dramatic spike in commodity prices that we have seen in 2010.
Wheat futures have surged 63 percent since the month of June. Wheat has recently been selling well above 7 dollars a bushel on the Chicago Board of Trade.
But wheat is far from alone. In his recent column entitled “An Inflationary Cocktail In The Making“, Richard Benson listed many of the other commodities that have seen extraordinary price increases over the past year….
*Agricultural Raw Materials: 24%
*Industrial Inputs Index: 25%
*Metals Price Index: 26%
*Palm Oil: 26%
*Iron Ore: 103%
Now, as those price increases enter the chain of production do you think that there is any chance that they will not cause inflation?
Do you think there is any chance at all that producers and retailers will not pass those costs on to consumers?
It is time to face facts.
Those cost increases are going to filter all the way through the system and your paycheck is soon not going to stretch nearly as far.
Inflation is coming.
Many savvy investors understand what is going on right now. That is one reason why gold and silver are absolutely soaring at the moment.
The price of gold set another record high on Friday for the sixth straight day.
Silver has also experienced extraordinary gains recently, and the U.S. Mint has officially raised their wholesale pricing above spot on American Silver Eagles from $1.50 to $2.00.
Meanwhile, there are even more rumblings that the Fed wants to print lots more money. On Friday, the president of the Federal Reserve Bank of New York, William Dudley, stated that the high unemployment and the low inflation that the United States is experiencing right now are “wholly unacceptable”….
“Further action is likely to be warranted unless the economic outlook evolves in such a way that makes me more confident that we will see better outcomes for both employment and inflation before long.”
During his remarks, Dudley even mentioned what the effect of another $500 billion increase in the Fed’s balance sheet would be.
Now keep in mind, this is not just another “Joe” who is making these remarks.
This is the president of the Federal Reserve Bank of New York – the most important of all the regional Fed banks.
In recent weeks it is almost as if you can hear Fed officials salivate as they consider the prospect of flooding the economy with even more money.
Up to this point, very little has worked to stimulate the dying U.S. economy. The Federal Reserve and the Obama administration are getting nervous as the American people become increasingly frustrated about the economic situation.
So will flooding the economy with even more money and causing even more inflation do the trick?
Well, no, but what inflated GDP figures will do is enable Obama and the Fed to say: “Look the economy is growing again!”
But if a flood of paper money causes the value of goods and services produced in the U.S. to go up by 5 percent but the real inflation rate is 10 percent, are we better off or are we worse off?
It doesn’t take a genius to figure that one out.
So don’t get fooled by “economic growth” numbers. Just because more money is changing hands doesn’t mean that the U.S. economy is doing better.
In fact, many American families are going to be financially shredded by the coming inflation tsunami.
Just think about it.
How far will your paycheck go when a half gallon of milk is 10 dollars and a loaf of bread is 5 dollars?
Already, it is incredibly difficult for the average American family of four to get by on $50,000 a year.
So how much money will we need when rampant inflation starts kicking in?
And do you think that your employers will actually give you pay raises to keep up with all of this inflation?
Not in these economic conditions.
In fact, median household incomes are declining from coast to coast all over the United States.
Earlier this year, Ben Bernanke promised Congress that the Federal Reserve would not “print money” to help the U.S. Congress finance the exploding U.S. national debt.
Did any of you believe him at the time?
Did any of you actually believe that the Federal Reserve would act responsibly and would attempt to keep the money supply and inflation under control?
The reality is that the entire Federal Reserve system is predicated on perpetual inflation and a perpetually expanding national debt.
Whatever wealth you and your family have been able to scrape together is going to continue to be whittled away month after month after month by the hidden tax of inflation.
And unfortunately, as discussed above, inflation is about to get a whole lot worse.
So is there any room for optimism? Is there any hope that we will not see horrible inflation in the years ahead? Please feel free to leave a comment with your opinion below….