Monetary Madness, Part II

Last week, I showed you how the Fed’s monstrous 6-year monetary expansion is mind-boggling in the extreme. To recap …

In the chart below, just look at the relatively gradual slope of money growth in the 1990s and 2000s — before the Lehman Brothers failure. And bear in mind that even that “slower” pace was considered irresponsibly rapid by many experts.

Next, look at the sudden explosion that began immediately after the Lehman Brothers failure!

That’s when the Fed threw all its old rule books into the East River. And that’s when the Fed flew off on a new, high-risk trajectory into the outer space of monetary policy.

Click for larger version

Then, see how the Fed’s immediate response to post-Lehman crisis (QE1) was replicated not just once, but twice — with QE2 and QE3.

Last, consider these outrageous facts:

Fact #1. Immediately prior to the Lehman Brothers failure, the Fed reports that the monetary base stood at $849.8 billion.

This past October 30, it was $3,607.7 billion. That’s an expansion of $2,757.8 billion — over $2.7 trillion.

Fact #2. This $2.7 trillion expansion has all taken place within just six years and one month.

If, instead, the Fed had continued to expand the monetary base at a normal pace (by the same amount as it had since 1961), it would have taken nearly 150 years to come this far. 

Fact #3. Prior to 2008, there were only two times the Fed embarked on an extremely rapid monetary explosion of this type — first in anticipation of the widely feared Y2K bug; and later, in the aftermath of the 9-11 terrorist attacks. But as of the latest tally, the post-Lehman QEs have been

• a whopping 43 times larger than the dramatic Y2K expansion, and …
• an unbelievable 69.5 times larger than the Fed’s explosive reaction to 9/11.

But the most alarming fact of all is this …

While the Fed has used crisis after crisis

to justify its monetary madness, it has

not yet begun to resolve the underlying

diseases that gave rise to those crises.

It has merely papered over their

symptoms.

Hard to believe? Then take a quick look at each crisis one by one, and you’ll begin to see what I mean …

1. 2008 Debt Crisis

Primary causes:  (A) Excessive debts, (B) unwieldy high-risk financial instruments (derivatives), (C) unprecedented concentration of power in the hands of a few large institutions, and (D) unbridled speculation fueled by unnaturally low interest rates.

Current status:

A. Excessive debts. According to the Federal Reserve’s latest  Flow of Funds release (see p11), total credit market debt in the U.S. has not been trimmed down by one iota. Quite to the contrary, it has grown from $53.5 trillion in 2008 to $57.6 trillion at the end of the second quarter of this year.

B. High-risk derivatives. The latest quarterly report by the Office of the Comptroller of the Currency (OCC) (pdf page 13) shows that the total notional value of derivatives held by U.S. banks has also not diminished by one red cent. It has grown from $175.8 trillion in September 2008 to $231.6 trillion this year.

C. Concentration of power among largest institutions. The OCC also reports that “Derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions.” It documents how just four megabanks — JPMorgan Chase, Bank of America, Citibank and Goldman Sachs — control 93% of all derivatives in the entire banking industry.

D. Speculation fueled by unnaturally low interest rates. In the years leading up to 2008, the Fed pushed interest rates down artificially, stimulating the large housing bubble. After 2008, the Fed literally shoved them to the floor (near zero) and has kept them there ever since, stimulating an even larger bubble — in bonds.

2. Massive U.S. federal deficits

Primary causes: Structural problems related to overspending and massive, impossible-to-fulfill commitments to Social Security, Medicare and other benefits.

Current status: Instead of real progress, we are witnessing a string of fiscal cliffs, debt ceiling debacles and government shutdowns. The deficit has diminished in size, but almost exclusively thanks to a recovery in the U.S. economy, which, in itself, is driven largely by the Fed’s wild monetary expansion.

3. The European debt crisis

Primary causes: Overborrowing by weaker European Union members. Huge discrepancies in monetary and fiscal policy among Eurozone nations. Sprawling, burdensome welfare states in the largest, supposedly strongest, countries.

Current status: As in the U.S., the authorities have papered over the most blatant symptoms but done virtually nothing to resolve the underlying problems. France’s megabanks, larger than America’s giants, are especially vulnerable.

Bottom line:

Now it’s not just the economy that’s hooked on the $85-billion-per-month shot in the veins.

Now, the Fed itself is hooked! Now, it’s the Fed that’s also trapped — with no way out, except one …

Panic!

That’s right. The only way the Fed can possibly shed its printing-press addiction is with a panicky retreat. If that sounds incredible to you, consider history.

Like today, the Fed helped create a bond market bubble in the 1970s … but then began a panicky retreat in 1979 that helped drive T-bond yields to 13%, T-bill rates to 17% and the prime rate to 21%.

Like today, the Fed kept the lid on short-term interest rates in the early 1990s … but then was forced to unleash them in 1994, causing the largest calendar-year decline in bond prices in modern history.

And like today, in the first half of the 2000s, the Fed papered over every financial disaster it ran into — only to beat a sudden retreat by letting Lehman Brothers fail.

They will do the same thing again — not because of any particular plan, but because they will have no other choice.

How and why will the Fed beat a hasty retreat from its money-printing binge?

What might be some of the early, telltale signs to watch for?

And what steps can you take to protect yourself?

In the weeks ahead, we’ll provide the answers. So stay tuned.

Good luck and God bless!

Martin

---

EDITOR’S PICKS Is the Stock Market Suffering From Bubble Trouble? by Mike Burnick Janet Yellen, the nominee to be the next leader of the Federal Reserve, was on Capitol Hill last week explaining her outlook on the economy, quantitative easing (QE) and monetary policy. Bernanke’s Sacred Mission Drives Fed Policy by Bill Hall In past Money and Markets columns, I have been skeptical of Ben Bernanke’s and the Federal Reserve’s policies of keeping interest rates low and purchasing trillions of dollars of securities in an attempt to heal the badly damaged U.S. financial system. The Fed Is Missing the Rebound in the Economy by Mike Larson The chasm between what central bankers are saying about monetary policy and what the economy is actually doing couldn’t be wider than it is today.

THIS WEEK’S TOP STORIES ‘Don’t Fight the Fed’: More True Than Ever by Douglas Davenport Janet Yellen sailed through questioning by the Senate Banking Committee last week, and it’s all but certain that she’ll be confirmed as the first female Federal Reserve chairman. Investors viewed that as a signal that monetary policy for the foreseeable future will be more of the same — in short, easy money as far as the eye can see. As U.S. Stocks Fade, Could European Equities Break Out? by The Money and Markets Team Europe was hit hard by the Great Recession and the sovereign debt crisis — more so than the U.S. Unlike Europe, the U.S. didn’t suffer through a double-dip recession. Who Will Head the Fed? It Doesn’t Matter by Larry Edelson Once confirmed, as I am sure she will be, Janet Yellen will stop at nothing to help the economy.