How the Fed Keeps Feeding the Financial Crisis

Wow! Is this fun, or what? We are so lucky, we can scarcely believe it. We’re getting to live through something most people only read about in the history books…a monetary meltdown.

Last week, our own central bank – the US Federal Reserve – announced that it would print up another $600 billion. This will bring the total to $2.3 trillion added in just a bit over 24 months.

Is this crazy? Is it foolish? Is it stupid? Yes! It is all of those things and more – vain, pigheaded, destructive, reckless…

..choose your own adjective!

Intervention on this scale is risky. So, you might expect that the Fed has some sort of computer program – trusted, reliable, tested and proven – that tells it exactly how much money to put into the system via its QE program…and when.

Well, if you think that, you’re dreaming. The Fed has no such computer program. No formula. Not even a theory that will hold up to inspection.

The whole thing is just a willful, dangerous gamble.

And we’re just happy that it is happening now…when we’re still alive to appreciate it.

It’s not everyone who gets to see a genuine, real-life example of hyperinflation…depression…money panic…and currency suicide. We’re going to see them all. At least, we think so…

Yesterday, the Dow went down 60 points. Gold rose $6.

A 60-point decline isn’t much. But how come now? How could it be that it comes a week after the Fed announced the boldest, most flamboyant and foolhardy adventure in currency debasement in history?

We don’t know. But it doesn’t look good. We would normally expect investors to take the bait…to run up stock prices a bit more. And THEN we’d have a stock crash.

Could it be that investors are looking ahead? Could it be that they see the handwriting on the wall? Could it be that they can read it – even from a distance – and that is spells DISASTER?

Again, if we knew the answer to these questions… Well, never mind…no one knows the answer.

Since we don’t know, we’re going to run our Crash Alert flag up the pole. The old, tattered flag isn’t always a reliable indicator of a coming crash. But it is a pretty good signal of the risk of a crash.

Again, we don’t know what will happen. But we know the risk of a crash is high. Investors are buying stocks as speculations. The Fed’s hot money is not really going to improve the economy. Everyone but Ben Bernanke knows that. Investors are just speculating that it will push up the stock market. They’re gambling too – just like the Fed.

And maybe it will. But it will be temporary. Because the only thing that can push up the stock market in a reliable way is real growth. And you don’t get real growth by running the printing press. If you did, Zimbabwe would be growing faster than China.

No, dear reader, hot money produces hot action in the market. Speculative fever. Bubbles.

..And crashes, of course.

Watch out. Stay out.

And more thoughts…

It’s rainy and cold here in Paris.

But Paris has its charms…even when the weather is bad. Its cafŽs… On almost every corner is a cafŽ. And in it are people chatting…

We went for a drink on the Boulevard Raspail with a colleague. Caroline is doing something exciting…something remarkable… We’ll have to tell you about it tomorrow. We’re running out of time this morning…

*** Meanwhile…

“Global Backlash Grows,” says The Wall Street Journal.

This is the backlash against Ben Bernanke’s crackpot money-printing scheme.

The foreigners don’t like it. Because the US is flooding the world with “hot money.” This fast cash chases oil, commodities, collectibles, farmland – just about everything.

It creates bubbles. It distorts markets. And it will certainly lead to busts and bankruptcies…and maybe to hyperinflation, too.

So, sit back and enjoy the show, dear reader. It’s the greatest show on earth. Yes, it will most likely lead to embarrassment and poverty in the US. Yes, the US dollar will cease being the world’s reserve currency. And yes, America’s leading economists – many of whom have won Nobel prizes – will be shown to be hapless goofballs.

But this is all good news to us. Under the leadership of modern US economists, Americans have been getting poorer for the last 10 years.

Why? How could that be?

With the encouragement of the Fed and Congress, Americans consumed more than they produced. “Go out and buy an SUV,” said a Federal Reserve governor. “Buy a new house,” said Fannie Mae. “Spend, spend, spend,” said mainstream economists.

Result: Americans have less real, net wealth than they had when this millennium began.

Now, finally, the average yahoo is wising up. He’s lost this job. And he knows he’s been played for a fool. But he’s learning. He’s defaulting on his mortgage…and he’s paying down his debt.

Consumer credit keeps contracting…it went down by $2.1 billion in September.

But the feds have kept at it. They tempted him with lower interest rates: the Fed brought its key rate down to zero; it can’t go lower.

The Fed also bought up worthless mortgage loans so he could borrow more cheaply and took over Fannie and Freddie so they could continue suckering people into a lifetime of mortgage payments. The latest word is that losses from Fannie and Freddie could reach to $363 billion through 2013, according to the Federal Housing Finance Agency.

But with Tea Partiers in the House…and the Fed hard up against the “zero bound,” what else could they do?

The Fed could print money! No need to ask Congress to pass spending legislation now. Forget what it says in the Constitution. The Fed can print money. And it can use the money how it sees fit – even funding an “off the records” stimulus program if it wants to.

Each dollar is, in effect, a liability of the US government…engaging the full faith and credit of the government and its taxpayers. But what law was voted on? What act of Congress authorized spending billions of dollars?

How came it to be that the taxpayers are on the hook for $600 billion more in financial responsibilities with no vote of their elected representatives? No point in even asking the question….

This is, after all, late, degenerate state-guided capitalism. If Congress can make citizens buy something they don’t want – such as health insurance – surely the Fed, which is a privately-owned bank, can write checks from the taxpayers’ checkbooks. Heck, nothing is too absurd.

So, the Fed goes boldly where no sensible person would want to go. It is trying – trying! – to create bubbles…asset bubbles, to make people feel like they have more money. If people feel richer, the feds reason, they’ll spend more money. Presto, we’ll be richer.

Are we beginning to rant and rave? Are we “losing it”? Is there a doctor in the house?


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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3 Comments on "How the Fed Keeps Feeding the Financial Crisis"

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has anyone written an Alice in Wonderland version of this stuff. Alice found Humpty sitting on his wall, breaking egg shells into smaller and smaller pieces. “What are you doing”, asked Allice “Making more money” explained Humpty “But that’s not real money” said Alice, in wonder “It is what I say it is, and I say it is money, and I am making more of it to get richer”, said Humpty Dumpty “Whatever”, said Alice, “carfeul you dont fall and get too rich, and sticky to boot. “Dont worry”, said Humpty, ” all the Feds horses and all the Feds… Read more »
Wilfred Berendsen
“And you don’t get real growth by running the printing press”. This is really not true. You DO get real growth by running the printing press or just increase the special numbers called money. By that, consumption increases. And, what most people do not understand is the fact that the crisis was NOT caused by the banks but simply by the fact that there is TOO LESS MONEY. money is a catalyst for growth, and if there is TOO LESS MONEY for this growth it will not happen. Inflation is just a logical result of insanities in our system and… Read more »
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