June 4, 2012 By gpc1981
http://albertpeia.com/eusystemicrisk.htm
What makes
this time different?
Several
items:
1)
The Crisis coming from
2)
The Fed is now politically toxic and cannot engage in aggressive monetary
policy without experiencing severe political backlash (this is an election year).
3)
The Fed’s resources are spent to the point that the only thing the Fed could do would be to announce an ENORMOUS
monetary program which would cause a Crisis in of itself.
Let
me walk through each of these one at a time.
Regarding
#1, we have several facts that we need to remember. They are:
1)
According to the IMF, European banks as a whole are leveraged at 26 to 1 (this
data point is based on reported loans… the real leverage levels are likely
much, much higher.) These are a Lehman Brothers leverage levels.
2)
The European Banking system is over $46 trillion in
size (nearly 3X total EU GDP).
3)
The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in
size (larger than
4)
Over a quarter of the ECB’s balance sheet is PIIGS
debt which the ECB will dump any and all losses from onto national Central
Banks (read:
So we’re
talking about a banking system that is nearly four times that of the US ($46
trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1
for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its
balance sheet with loads of garbage debts, giving it a leverage level of 36 to
1.
And
all of this is occurring in a region of 17 different countries none of which
have a great history of getting along… at a time when old political tensions
are rapidly heating up.
As
bad as the above points may be, they don’t even come close to describing the
REAL situation in
And
that’s
To be
clear, the Fed, indeed, Global Central Banks in general, have never had to deal
with a problem the size of the coming EU’s Banking Crisis. There are already
signs that bank runs are in progress in the PIIGS and now spreading to
I
want to stress all of these facts because I am often labeled as being just “doom
and gloom” all the time. But I am not in fact doom and gloom. I am a realist.
And EU is a colossal mess beyond the scope of anyone’s imagination. The World’s
Central Banks cannot possibly hope to contain it. They literally have one of
two choices:
1)
Monetize everything (hyperinflation)
2)
Allow the defaults and collapse to happen (mega-deflation)
If
they opt for #1,
Moreover,
we need to consider that the Fed is now so politically toxic that Ben Bernanke
is literally going on the campaign trail to attempt to convince the American
people that the Fed is an honest and helpful organization. Put another way,
there is NO CHANCE the Fed can announce a large-scale monetary policy unless a
massive Crisis hits and stocks fall at
least 15%.
Finally,
regarding my third point… if the Fed were
to announce a new policy it would have to be MASSIVE, as in more than $2
trillion in scope. Remember, the $600 billion spent during QE 2 barely bought
three months of improved economic data in the
So
given that the Fed will only be able to announce a large scale program in reaction to a Crisis, whatever it did announce would have to be ENORMOUS, a
kind of shock and awe, attempt to rein in the markets.
Moreover,
it would literally be THE LAST QE the Fed could hope to ever announce as
political outrage from the ensuing Dollar collapse and inflationary pressures
would likely see the open riots and/or the Fed dismantled (this has happened
twice before in the US’s history).
In
simple terms, the Fed’s hands are tied until a huge Crisis hits. And then, if the Fed acts it’s going to have to go “all
in” with a massive program. If it does, we will still experience a Crisis, as the Dollar would collapse
pushing inflation through the roof as well as interest rates (which in turn
would destroy the banks as well as the
In
simple terms, this time around, when
Again,
this time it is different. I
realize most people believe the Fed can just hit “print” and solve everything,
but they’re wrong. The last time the Fed hit “print” food prices hit records
and revolutions began spreading in emerging markets. If the Fed does it again,
especially in a more aggressive manner as it would have to, we would indeed
enter a dark period in the world and the capital markets.
|
Country |
GDP |
|
European Union |
$16 trillion |
|
|
$14.5 trillion |
|
|
$5.8 trillion |
|
|
$5.4 trillion |
|
European Central
Bank |
$3.8 trillion |
|
|
$3.2 trillion |
|
US Federal Reserve |
$2.8 trillion |
|
|
$2.5 trillion |
|
|
$2.2 trillion |
|
Banking System |
Total Assets |
Total Assets
Relative to GDP |
Total Assets
Relative to Central Bank Balance Sheet |
|
|
$46 trillion |
287% |
1,210% |
|
US |
$12 trillion |
82% |
428% |
This is not Doom and Gloom, this is reality.
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