The global economic crisis that erupted in 2008, and was supposedly “cured” by the massive public debts incurred by the policymakers, is apparently evolving into a terminal tailspin. A growing number of reputable economists, including Nouriel Roubini, are frankly stating that advanced economies, in particular the United States, the Eurozone countries and the United Kingdom, have entered a double-dip recession. The economic outlook is so bleak that even establishment institutions such as the International Monetary Fund, and to a lesser extent the U.S. Federal Reserve, are candidly acknowledging the dire state of the global economy and the precariousness of its financial architecture. Fed Chairman Ben Bernanke was forced prematurely to hint at some level of policy intervention; the result, the so-called “Operation Twist,” a macabre arrangement whereby the Federal Reserve’s short-term purchases of U.S. Treasuries are swapped for long-term government debt instruments. The resulting plunge in equity values demonstrates that the market is no longer easily fooled by Bernanke and his clowns.

In a starkly candid statement, the new managing director of the IMF said that the world’s economy was entering a “dangerous place.” Given that the leaders of major global economic bodies do not seek to erode market confidence during turbulent economic times, it must be surmised that Christine Lagarde would not have issued such a pronouncement as the leader of the IMF unless the data she is privy to shows that things are actually much worse than what is being publicly discussed.

Will my prediction of economic catastrophe in 2012 hold true? Based on current developments and increasingly grim talk by economists and policymakers such as the IMF’s managing director, I think the chances that I am wrong are weaker than the likelihood that my forecast is correct.

 

                 

 

 

 

 

 

 

 

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In an Op-Ed  piece in The New York Times, Paul Volcker, chairman of the Federal Reserve during 1979- 1987, issued an eloquent warning against economic policymakers deliberately increasing the inflation rate as a way of dealing with escalating economic and fiscal problems that have defied all other policy measures. Volcker’s Op-Ed, entitled, “A Little Inflation Can Be a Dangerous Thing,” warrants serious reading by all concerned with the global economic crisis. Paul Volcker knows what he is talking about; it was he as Fed Chairman during the Reagan administration who squeezed high inflation out of the U.S. economy through a draconian process of high interest rates.

Here are extracts of what Volcker wrote in his Op-Ed piece:

“There is great and understandable disappointment about high unemployment and the absence of a robust economy, and even concern about the possibility of a renewed downturn. There is also a sense of desperation that both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interest rates.

“So now we are beginning to hear murmurings about the possible invigorating effects of ‘just a little inflation.’ Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the ‘animal spirits’ of business, or so the argument goes… Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth… At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.”

In particular, due to the global sovereign debt crisis, economists and policymakers are discussing behind closed doors the desirability of a 5-6 percent annual inflation rate as a way of reducing the burden of national debts in advanced economies. As if the experience of Weimar Germany and Zimbabwe wasn’t enough to show the irrationality of such an approach, Paul Volcker again reminds us of the futility of engineering deliberate inflation as a policy “cure” for our economic woes. One can only hope that the former Fed Chairman’s clear warning is heeded.

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 Today the Dow Jones rose by more than 300 points. This was not due to positive economic news; to the contrary, negative news drove the NYSE up. How is it that the cascading torrent of appalling economic data would raise cheers on Wall Street? In the bizarre economic and financial world of today, the computer program traders and investors on Wall Street are convinced that the worsening economic situation globally will compel Ben Bernanke, Chairman of the Federal Reserve, to unleash a third bout of quantitative easing. In the myopic universe of the Wall Street crowd, this is considered the most wonderful  thing that can happen on our planet.

The two bouts of quantitative easing already engaged in by the Fed have been, by consensus of most credible economists, ineffectual. What this mad money printing did accomplish was to inflate commodity prices, creating a drag on the global economy. But if at first you don’t succeed, try again, so say the Wall Street oligarchs. And so when the central bankers convene for their annual conclave in Jackson Hole, Wyoming the Wall Street oligarchs will be hoping and praying for QE3.  Only a clique infused with short-term greed and distorted illusions could believe that bad economic news leading to Bernanke unleashing another round of printing money will end the global economic crisis.

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Alan Greenspan, former Fed Chairman and a prime facilitator of the U.S. housing bubble, appears in retrospect a scion of fiscal prudence in comparison with his successor, Ben Bernanke.  This disaster-prone Fed Chairman presided over the financial collapse of 2008, which came in the wake of his prediction that the housing bubble would not cause a recession, let alone a global financial meltdown. And this man is still the most powerful architect of U.S. monetary policy?

 In his recent speech delivered at the International Monetary Conference in Atlanta, Bernanke blamed everything but himself for what he concedes is anemic economic growth, which he knows all too well is being artificially propped up by the most expansive monetary and fiscal policies in human history. In the Fed Chairman’s world, the earthquake and tsunami in Japan, weather conditions and other unpredictable “acts of God” are to blame, not the Federal Reserve’s polices, for the utter disaster that the U.S. and many other advanced economies are coping with.

While in Atlanta, Ben Bernanke made passing reference to the sharp rise in commodity prices, though without admitting that this was due largely to the Fed’s policy of quantitative easing. He then added the illogical assessment that inflation is “not broad based” in the economy. Really?

As he has done before, Bernanke made perfunctory remarks about the need for the policymakers to eventually bring down the U.S. federal government’s budget deficit. As he and his colleagues continue to propel the United States towards a fiscal train wreck, he holds the politicians with no power to rein in Bernanke with responsibility for preventing the future shocks that the Fed’s policies have in store for everyone.

The disconnect this man has with the real world is mind-numbing. One thing, however, we can be thankful for. At least Bernanke has avoided the personal behavior issues that led to the recent resignation of the head of the IMF. With Fed Chairman Ben Bernanke, the question is all about his performance as Fed Chairman, and nothing else. On that score, history will probably judge President Barack Obama harshly for reappointing Ben Bernanke as Fed chairman.

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If anyone really believed that Federal Reserve Chairman Ben Bernanke was not deliberately destroying the intrinsic value of the American dollar through his recklessly loose monetary policies, the current downward spiral of the greenback is abundant evidence to the contrary. Most telling, despite severe fiscal problems in the Eurozone, even the wobbly euro is gaining strength in significant measure against the U.S. dollar.

It is not only against the basket of foreign currencies, including those considered weak, that the American dollar is winning the dubious race to the bottom. Commodities across the globe have risen sharply against the dollar. This is reflected not only in the price of known hedges against price inflation and currency manipulation such as gold and silver. A diverse range of resource commodities, including oil and natural gas, minerals and basic foodstuffs have increased in their dollar price. With the U.S. dollar remaining (for now) the global reserve currency, the morbidly inverse ratio between the plummeting value of the dollar and rising cost of commodities has had severe negative repercussions across the globe, both economically and politically. The current unrest sweeping the Arab world is at least in part due to rising food prices precipitated by Bernanke’s deliberate policy of eroding the value of America’s dollar.

My read of this situation is that the Federal Reserve is in a panic. They know that the American fiscal imbalance is unsustainable, and it seems Bernanke and company are deliberately eroding the value of America’s currency in order to default stealthily on the nation’s massive foreign debt, which the Fed knows can never be repaid, at least in terms of real value as opposed to nominal repayment. Inflation is the direct outcome of the Fed’s quantitative easing and monetization of the debt. The American taxpayer and consumer is being sacrificed, at whatever the cost, in order to inflate away that portion of the U.S. national debt which cannot be repaid.

The fools at the Federal Reserve really believe that China, OPEC and other foreign creditors are going to accept the destruction of their investment in U.S, Treasuries lying down, and that the U.S. dollar will forever remain the world’s reserve currency. I think that sooner rather than later future developments will render inoperative all the flawed assumptions of Ben Bernanke and his wrecking crew, otherwise known as the Federal Reserve.

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Two years after the onset of the global financial crisis, sparked largely by the collapse of the American residential home market, primarily proprieties financed with sub-prime mortgages, the aftershocks continue. The latest data concludes that 2010 witnessed one million home foreclosures in the United States, a record high. While the tail end of 2010 did witness a deceleration in foreclosure filings, this seeminlgly positive news is misleading. The slowdown was caused by revelations that banks had resorted to improper documentation in persuing home foreclosures. This has led to a temporary reduction in such filings, however this merely means that there will likely be an acceleration in the foreclosure rate during 2011.

The continuing and growing foreclosure disaster in America contradicts all the other supposedly positive economic data pointed to by policymakers and their spin-masters ( that is, if you think the Federal Reserve engaging in a second round of quantitative easing is “positive” news). Despite the massive stimulus-derived public budget deficits and Fed money-printing, the weak housing sector in the U.S. will likely continue to be a wet blanket that suffocates the marginal economic growth being conjured into existence through unprecedented levels of public debt expansion. Clearly, the housing crisis that begat the global financial and economic crisis is far from over.

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It is not the “Road To Morocco” ( for those who remember the classic film with Bing Crosby and Bob Hope) but he proverbial road to ruin that Fed Chairman Ben Bernanke is leading the U.S. economy towards, at flank speed. Under his leadership, the last meeting of the Federal Reserve’s FOMC of 2010 confirmed the zero interest rate policy being maintained, and the policy decision to purchase $600 billion in long-term U.S. Treasury debt. This, despite claims by many punch-drunk economists that the American economy is recovering, and at a heightened pace. Give Bernanke credit for one thing; he knows the supposed economic growth is not real, but rather marginal increments painfully extracted through massive public borrowing. But his solution, in effect creating even more public stimulus, this time through monetary policy, is totally antithetical.

Supposedly, Bernanke’s stratagem is to force down long-term interest rates through his $600 billion second round of quantitative easing. However, the bond market is reacting in a manner contrary to expectations. With Europe already mired in a deep sovereign debt crisis, the prospect of a surge in now record low interest rates on U.S. sovereign debt is becoming increasingly likely, due to the Fed’s policies. Should the U.S. encounter anything remotely like the spike on bond yields currently plaguing Europe, the game is up. Not even Bernanke could print enough money to cover the ruinous implosion an increasingly likely sovereign debt crisis will have on the already fragile American economy.

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The latest U.S. official employment data states that fewer than 40,000 new jobs were created in November, well below the level required to cover new entries into the workforce due to natural population growth. Officially, the U.S. unemployment rate stands at 9.8%, though factoring in discouraged workers and part-time employees unable to find full-time work, the actual figure hovers near 20 percent. More alarmingly, long-term unemployment in America stands at the highest level since the Great Depression of the 1930s.

Despite the dismal employment numbers, there remains among economic commentators in the United States eternal optimists who believe there are still “green shoots” pointing to an economic recovery. Some even maintain that the actual job creation numbers for November are much higher than the official numbers, despite much more voluminous contrary evidence.

In contrast with the optimists, the Federal Reserve Chairman, Ben Bernanke, is already hinting at the need for a third round of quantitative easing, after his recent unleashing of QE2, a $600 billion orgy of money-printing by the Fed. Bernanke knows that the employment situation in the U.S. is a catastrophe, meaning there can be no consumer-led recovery of the economy, that at a time when the Obama stimulus money is running out. With a second stimulus program off the table now that the Republicans have taken control of the House of Representatives, the Federal Reserve sees itself as the only avenue for stimulus in a desperate drive to revive job creation in America. However, to think that monetary policy can be more effective than fiscal policy in facilitating job creation seems like the last great gasp of an incorrigible fool.

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Ben Bernanke, Chairman of the Federal Reserve, is up to his old tricks and gimmicks. His earlier bout of quantitative easing, totaling nearly two trillion dollars, was a miserable failure, attested to by an official U.S. unemployment rate of 9.6% and unofficial but more accurate rate of 17 percent, when underemployed and discouraged workers are accounted for. With no likelihood that Congress will spring for a second economic stimulus spending program, Bernanke and the Fed are now implementing QE2.

The second round of quantitative easing by the Federal Reserve will involve the purchase of 600 billion dollars in long-term U.S. Treasuries by the 2nd quarter of 2011. This is a gamble by the Fed, which I don’t see having a snowball’s chance in hell of being any more effective than the first round of quantitative easing. Furthermore, printing money out of thin air to buy government debt, in effect monetizing the debt, creates the risk of severe inflation, failed treasury auctions and the radical devaluation of the U.S. dollar.

It may be that Bernanke is doing QE2 precisely to weaken the dollar, though he would never say so publicly. In theory, a weaker dollar would make U.S. exports more competitive, leading to the creation of new jobs. However, as reported in an earlier blog, virtually every major economy is manipulating its currency in a race to the bottom. Not even dollar devaluation, if that is the Fed’s goal, will reverse the negative character of the U.S. economy and its grim unemployment crisis.

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In a step that will be one of the markers on the road to economic and financial catastrophe, the Federal Open Market Committee (otherwise known as the FOMC) of the Federal Reserve, made a bombshell policy decision on August 10, 2010, one fraught with dangerous long-term consequences for the American and global economy. In a policy being dubbed QE2, the Federal Reserve’s FOMC conceded that the so-called U.S. economic recovery has “slowed,” and required more stimulus from the Fed. However, with federal funds interest rates now effectively at zero, the only aspect of monetary policy left is money printing. Thus, the Federal Reserve, in effect, will use its printing press to buy long-term U.S. government debt.

Of course, that is not how the FOMC is positioning this major escalation in quantitative easing by the Federal Reserve. In the dry, obtuse language that the obscurantists of the Federal Reserve love to engage in, the committee’s official statement said:

“To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.”

In  its first bout of heavy quantitative easing, in the wake of the implosion of the major Wall Street investment  banks in the fall of 2008, Ben Bernanke, utilizing his printing press, purchased $1.25 trillion in mortgage-backed securities, and an additional $200 billion in debts owed by so-called government-sponsored enterprises, primarily Freddie Mac and Fannie Mae. This massive explosion in the Fed’s balance sheet has thus far failed to stimulate economic activity and retard a persistent deflationary recession. All that Bernanke has accomplished has been to create a new asset bubble, this time on Wall Street, with equities exploding in price far beyond their post-crisis lows. Beyond the Dow Jones index, however, the impact of Bernanke’s balance sheet expansion has been impotent in the face of economic realities, particularly a collapsing labor market and the contraction in consumer demand. The erosion in the M3 money supply, a statistic the Federal Reserve no longer publicly discloses, attests to the failure of its policies.

Now that the Federal Reserve admits, though in its typically obscure linguistic constructs, that a double-dip recession is becoming increasingly likely, Bernanke is going to enter a buying binge of long-term U.S. Treasuries. The hope is that this will stabilize financial markets, and somehow force liquidity into the economy. That, at least is the hope. Given Ben Bernanke’s track record, I would not bank on hope in the infallible judgement of the Federal Reserve and its FOMC.

What is likely to result from the QE2 phase of the Federal Reserve’s disastrous policymaking? In time, sovereign wealth funds will recognize Bernanke’s manoeuvre for what it is: monetization of the U.S. national debt. When that happens, Treasury auctions will begin to fail, and yields will advance. This will all put added pressure on the Fed to print even more dollars, and monetize an increasing proportion of the federal government’s debt. This will unquestionably inject liquidity into the U.S. economy. But this Federal Reserve monetary injection will be as beneficial as money printing was in Weimar Germany in the early1920s, or Zimbabwe more recently.

In deciding on a process that will lead to an ever-growing proportion of the U.S. national debt and yearly budget deficits being monetized by its printing press, the Federal Reserve, under the leadership of its chairman, Ben Bernanke, has taken a fateful step towards irredeemable economic and financial ruin, ultimately convulsing America with a savage, hyperinflationary depression. And, as history teaches us, severe economic depressions bring along other unanticipated consequences, often leading to political and social turmoil and even global war.

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