Dangerous Unintended Consequences

Martin here with an urgent update on the next phase of this crisis …

Fed Chairman Bernanke and Treasury Secretary Geithner are in for a rude awakening.

Even as they declare “victory” in their battle against the debt disaster on Wall Street, they face defeat in the war against four dangerous, unintended consequences on Main Street:

Dangerous Consequence #1
Fed Rewarding High-Roller Gamblers,
While Punishing Prudent U.S. Savers!

Bernanke promises he’ll keep official interest rates near zero indefinitely, vows to print as much paper money as needed, and leaves the distinct impression that he won’t change course until hell freezes over.

In a nutshell, he isn’t just following a traditional easy-money policy. He’s pushing a free-money policy!

For the world’s high-rolling speculators, this is like manna from heaven.

They borrow U.S. dollars on the cheap. And then they buy the highest yielding investments they can lay their hands on — including junk bonds and even old, discarded subprime mortgages.

But for millions of American households pinching pennies and trying to rebuild their ruined finances, it’s a direct blow to the gut.

Indeed, American savers are finding that bank CD rates are ridiculously low. They’re finding that rates on money market funds are equally bad.

And for those seeking the extra safety that only 3-month Treasury bills can provide, the punishment is the harshest of all:

The Fed’s free-money policy has driven down the 3-month Treasury-bill rate from a monthly average of 5 percent in early 2007 to a meager 0.12 percent last month.

Worse, the Fed’s policy has kept the 3-month T-bill rate under one percent for a full year, with the rate averaging less than a quarter percent during 10 of the last 12 months.

Bottom line: Right now, $1,000 invested in a 3-month Treasury bill yields a meager $1.20 in yearly interest. At that rate, just to match the 5 percent interest you could have earned on T-bills in early 2007, you’d have to leave your money sitting there for 42 years! And if you wanted to match the generous 16 percent interest available in 1981, you’d need to let it sit for 135 years.

U.S. savers are obviously getting shafted.

Dangerous Consequence #2
U.S. Treasury Gobbling Up Available Credit,
Crowding Out Nearly All U.S. Businesses!

I gave you all the gory details one week ago. But they can have such a great impact on every aspect of your finances, they bear repeating:

Due to giant bailouts and out-of-control federal deficits, the U.S. Treasury is now borrowing money at the fastest rate of all time, hogging nearly all available supplies of credit. Meanwhile, American businesses and average consumers are getting shut out — or even shoved out — of the credit markets.

Specifically …

In the first half of this year, the Treasury has stepped up its pace of borrowing to annual rates of $1.4 trillion in the first quarter and $1.9 trillion in the second quarter. That’s 3.5 times and six times more than last year’s pace, respectively.

Meanwhile, businesses are getting crumbs — or less: Last year, banks provided new credit at the annual pace of $472.4 billion in the first quarter and $86.7 billion in the second. This year, on a net basis, they’re not providing any credit whatsoever. In fact, they’re actually liquidating loans at the rate of $857.2 billion in the first quarter and $931.3 billion in the second.

Ditto for mortgages. Last year, mortgages were being created at the annual clip of $522.5 billion and $124 billion in the first and second quarters, respectively. This year, they’ve been liquidated at an annual pace of $39.3 billion in the first quarter and $239.5 billion in the second.

For consumers to borrow on credit cards and with other consumer loans is even tougher. Last year, folks were able to add to their consumer credit at annual rates of $115 billion and $105 billion in the first two quarters. This year, in contrast, they’ve been forced to cut down their credit balances at annual rates of $95.3 billion in the first quarter and $166.8 billion in the second quarter.

Clearly, consumers, small businesses, and even larger businesses are also getting shafted.

Dangerous Consequence #3
Wall Street Traders Reap Gigantic Rewards;
Average Workers Face Worst U.S. Job
Market Ever Recorded!

According to the U.S. Comptroller of the Currency, the biggest single high-stakes derivatives gambler on Wall Street is Goldman Sachs:

For every dollar it has in capital, Goldman Sachs is risking a whopping $9.21 on possible defaults by its trading partners, or more than TRIPLE the risk being assumed by the larger high-rolling champion JPMorgan Chase.

So it should come as no surprise that, with the U.S. Federal Reserve virtually guaranteeing a Garden-of-Eden financial environment for banks, Goldman has hit the jackpot this year: The bank has accumulated a bonus pool of an estimated $16 billion to dish out to an exclusive group of its heavy hitters.

That’s enough to cover a $5,000 bonus check for each and every household living in Los Angeles, Chicago, San Francisco, and Detroit.

Meanwhile, all across the USA, with small and medium-sized businesses unable to get credit or hire …

Long-term joblessness has hit the highest level in at least a half century: The share of the unemployed who were out of work for at least six months reached 35.6 percent in September, the most since the U.S. Labor Department began keeping statistics in 1948.
More than 5.4 million people have been unemployed for at least 27 weeks, with 1.3 million expected to exhaust their benefits by the end of this year.
15 million unemployed Americans are competing for 3 million available jobs, the worst on record.
More than 7.2 million jobs have been lost in the past 21 months. In contrast, in the 30 months of the past recession, only 2.7 million jobs were lost.
The official unemployment rate, at 9.8 percent, is just the tip of the iceberg. The true unemployment rate, including part-time workers who can’t find full-time jobs and workers who have given up looking, is 17 percent according to the U.S. Labor Department and 21.4 percent according to Shadow Government Statistics.

But this is not just about the privileged few getting an oversized piece of the pie while most others get crumbs. Quite the contrary, it’s a crisis that impacts us ALL, regardless of income …

Dangerous Consequence #4
The Debt Crisis of 2008 Has
Now Been Transformed Into
The Dollar Crisis of 2009-2010!

With Bernanke and Geithner galloping ahead on all fronts — free money, bailout madness, and the greatest Treasury borrowing of all time — they have jeopardized our entire future in a way that’s never been done before.

Result: What was once strictly a crisis of Wall Street has now become a crisis for all Americans. What was once a near-term threat to financial markets is now becoming a long-term threat to the entire nation.

A growing chorus of central banks and international institutions are proposing to replace the dollar as the world’s primary reserve currency.

Foreign oil producers are threatening to abandon the dollar as the medium of exchange.

And the tidal wave has barely begun.

My recommendation: Despite their low yields, don’t let anything lure you away from the ultimate safety of Treasury bills. Plus, be sure to protect yourself from this new phase of the crisis with investments that almost invariably rise when the dollar declines.

Good luck and God bless!

Martin

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