Neither
the Fed Nor the ECB Will Be Able to Stop What’s Coming
May 21, 2012 By gpc1981
http://albertpeia.com/fedecbcantstopcomingcrash.htm
‘Today,
we are witnessing the investment world’s slow awakening to the fact that the
monetary actions taken by the world’s Central Banks have not in fact solved the
issues leading up to the 2008 Crisis.
In
point of fact, the Central Banks’ actions have exacerbated pre-existing
problems (excessive leverage) while
simultaneously creating new
problems (inflation).
This
slow awakening has taken much longer than I would have expected, but with tens
of thousands of careers on the line (financial professionals) as well as tens
of trillions of dollars in portfolios at risk, the vast majority of
professional market participants were highly incentivized not to realize these issues.
However,
at this point, it is becoming clear that not only are financial professionals
slowly realizing that 2008 was actually “the warm up,” but that Central Banks
themselves are aware that they’ve:
1)
Failed to solve the issues leading up to 2008.
2)
Created other unforeseen problems.
Indeed,
this process of realization first began in the US where we had signs as far
back as April 2011 that the Federal Reserve was aware that QE (AKA monetization
of US debt) was less “attractive” as a policy (read: not such a good idea).
The
vast majority of the media and Wall Street analysts failed to recognize this,
though Bernanke himself admitted it in public:
Q. Since both housing and unemployment have not recovered
sufficiently, why are you not instantly embarking on QE3? —
Michael A. Kamperman,
Mr. Bernanke: “Going
forward, we’ll have to continue to make judgments about whether additional
steps are warranted, but as we do so, we
have to keep in mind that we do have a dual mandate, that we do have to worry
about both the rate of growth but also the inflation rate…
“The trade-offs are getting — are getting less
attractive at this point. Inflation has gotten higher.
Inflation expectations are a bit higher. It’s not clear that we can get
substantial improvements in payrolls without some additional inflation risk. And in my view, if we’re going to have success in
creating a long-run, sustainable recovery with lots of job growth, we’ve got to
keep inflation under control. So we’ve got to look at both of
those — both parts of the mandate as we — as we choose policy”
http://economix.blogs.nytimes.com/2011/04/28/how-bernanke-answered-your-questions/
This
admission marked the beginning of a process through which the
I
addressed this at length in previous articles. But the main issue is that the
Fed backed off from rampant monetization and began to simply issue verbal
statements that it would ease if needed, thereby getting the same impact
(boosting stock prices) without actually having to monetize debt/ print more
money.
Indeed,
the only monetary change the Fed has made in nearly a year was the launch of
Operation Twist 2 in October 2011. However, even this policy was more about
meeting immediate debt issuance needs in the
Operation
Twist 2 was a policy through which the Fed would sell its short-term Treasury
holdings and use the proceeds to buy longer-term Treasuries. The purpose of
this policy was two fold:
1)
To make up for the lack of foreign demand in long-term Treasuries.
2)
To provide capital to banks by permitting them to unload their long-term
Treasury holdings in exchange for new cash.
Regarding
#1, the Fed is now obviously aware that the policies it has pursued in tandem
with the Federal Government, namely maintaining low interest rates while
running massive deficits and increasing the Federal Debt to the tune of
$100-200 billion per month, have severely damaged the
This
is only common sense. By running Debt to GDP and Deficit to GDP ratios that are
on par with the European PIIGS, the US has made it clear that those investors
who lend to it for the long-term (20+ years) are likely going to experience a
haircut or bond restructuring much as Greece bondholders recently experienced.
Because
of a lack of foreign interest in long-term Treasuries, the Fed decided to step
in to pick up the slack. As a result of this, the
Operations
Twist 2 has also allowed US commercial banks to unload their long-term Treasury
holdings in exchange for new capital: something most of the Primary Dealers are
in dire need of. This in turn helps to explain why the
Put
another way, the markets have been ramped higher by more juice from the Fed
(and corporate buybacks). However, the fact remains that this juice has come
from the Fed reallocating its current portfolio holdings, NOT printing more
money outright to monetize
So
while the media and 99% of analysts believe the Fed is and can continue to act
aggressively to prop up the markets, the fact is that the Fed has been reining
in its monetary stimulus over the last nine months, largely relying on verbal
intervention from Fed Presidents to push stocks higher.
We at
Consider
the latest FOMC statement released a few weeks ago…
Fed Signals No Need for More Easing
Unless Growth Falters
The Federal Reserve is holding off
on increasing monetary accommodation unless the
“A couple of members indicated that the initiation of
additional stimulus could become necessary if the economy lost momentum or if
inflation seemed likely to remain below” 2 percent, according to minutes of
their March 13 meeting released today in
Ignore
the verbal obfuscation here. The Fed knows
that inflation is higher than 2%. It also knows
that
Gas being
at $4 and food prices not far from record highs.
This being
an election year and the Fed now politically toxic.
Growing
public outrage over the Fed’s actions (secret loans, etc.) in the past.
Again,
we are in a process of slow awakening to the fact that the Fed has not solved
the problems that caused 2008. Instead, the Fed has exacerbated these problems
(excess leverage) and created new problems in the process (inflation).
Fortunately
for the Fed, the European Central Bank has picked up the intervention slack
since the Fed began pulling back in mid-2011. Indeed, between July 2011 and
today, the ECB has expanded its balance sheet by an incredible $1+ trillion:
more than the Fed’s QE 2 and QE lite combined (and in
just a nine month period).
The
two largest interventions were the ECB’s LTRO 1 and
LTRO 2, which saw the ECB handing out $645 billion and $712 billion to 523 and
800 banks respectively.
As a
result of this, the ECB’s balance sheet exploded to
nearly $4 trillion in size, larger than the GDPs of
This
rapid and extreme expansion of the ECB’s balance
sheet (again it was greater than QE lite and QE2
combined… in nine months) indicates the severity
of the banking crisis in
This
rapid expansion has also resulted in the ECB obtaining a similar political
toxicity to that of the
The
reason for this is obvious: any bank that participated in either LTRO
implicitly announced that it was in dire need of capital. As a result of this
the markets have stigmatized those banks that participated in the schemes,
thereby:
1)
Diminishing the impact of the ECB’s moves.
2)
Indicating that the ECB is now politically toxic in that those EU financial
institutions that rely on it for help are punished by the markets.
Thus
the two biggest market props of the last two years: the Fed and the ECB have
found their hands tied. What will follow will make 2008 look like a joke. On that note, if you have not taken steps to prepare
for the end of the EU (and its impact on the
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