Global Economic Crisis

 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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As a new year is about to dawn,  despite (and perhaps because of) massive government and central bank intervention in advanced and major economies, worrying signs are proliferating along with the contrived optimism about a supposed rebound  in global economic growth. Among the many clouds on the horizon regarding the global economic outlook for 2011, here are three:

1. Greek sovereign debt crisis not cured by the massive Eurozone and IMF bailout. Knowledgeable observers have pointed out that mathematically, it is not possible for the Greek state to deflate its economy in line with deficit reduction commitments required under terms of the bailout package, while simultaneously engineering a miraculous return to robust economic growth at a level sufficient to service the exploding public debt. There is already word being leaked to the Greek press by government officials that after the current bailout package expires in 2013, Athens will seek to restructure its sovereign debt.

2.  Irish banking crisis far from over. After receiving a staggering level of bailout assistance from the EU and IMF to cover the country’s insolvency due to guaranteeing the obligations of Anglo Irish Bank ( along with all other banking institutions in Ireland), the Dublin authorities were forced to inject nearly $5 billion into Allied Irish Banks, another bankrupt institution. As with Greece, it seems almost a certainty that Ireland will eventually seek to restructure its public debt.

3.  China, the one ray of hope in the global economy due to massive government injections of liquidity that have led to high levels of supposed growth during the global economic crisis, is now beginning to raise interest rates in a frantic effort aimed at reining in  burgeoning levels of price inflation. This could lead to a tightening in the Chinese economy, combined with a catastrophic deflation in the Chinese real estate market. Any downturn in China will reverberate with dire impact on the overall global economy.

Other than these three items, no need to worry, as Fed Chairman Ben Bernanke and a horde of policymakers assure us that their bouts of quantitative easing  and unprecedented levels of sovereign debt will somehow usher in a nirvana of good economic times. Unless, of course, you like I have no confidence in those who currently are the masters of our economic destiny.

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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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The British pound sank like a stone as the Governor of the Bank of England, Mervyn King, issued a grim warning during testimony before the UK Parliament’s Treasury Select Committee. The central fiscal problem is the £178 billion annual deficit incurred by Gordon Brown’s government in the midst of the global economic crisis.

Mervyn King indicated that the Bank of England will have to continue with quantitative easing in the face of the massive government deficits, sending negative signals to investors as to the stability of the nation’s currency. He warned that both the current government, and a likely new government to succeed Brown after the next British general election, must send a clear message to the markets that they have a credible plan to significantly reduce the nation’s fiscal deficits.

I think the current breed of politicians, in the UK and elsewhere, haven’t a clue how to address the massive, unsustainable deficits that plague virtually every major and advanced economy. Which means that it is only a matter of time before the UK, and then the US, follow in the footsteps of Greece down the road of national insolvency.

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There is not even a glimmer of optimism in the IMF forecast, except in the sense that some regions will contract at slower levels than others. Japan is projected to decline by 5.8 %, with lower but still shattering levels of economic contraction in the United States, the United Kingdom and Eurozone. Emerging markets, especially Eastern Europe, are assessed as being particularly vulnerable to the turbulence being unleashed by the Global Economic Crisis. “The risks are largest for emerging countries that rely on cross-border flows to finance current account deficits,” concludes the IMF in reference to the impact the global financial crisis and credit crunch have had on the debt-dependant economies of Eastern Europe.

Reading between the lines of the IMF forecast, it is clear that the contraction ratios would be even more severe, but are in effect being masked to a certain degree by so-called economic stimulus programs. In effect, future tax money is being borrowed to artificially create employment in the near term. However, the IMF report alludes to the challenges to be faced in 2010, when less stimulus spending is projected, especially in Europe. This is already a source of contention between the United States, which is currently projecting a deficit of 12% of her GDP, and the European Union where, in comparison, a much lower ratio is being allocated within the Eurozone. The UK, however, is forecast by the IMF to have attained a fiscal deficit in 2010 that will comprise 11% of her GDP, nearly the same percentage as is the case with the US federal budget.

With deficits soaring and projections of global economic contraction multiplying, the U.S. Federal Reserve has made its own unique contribution to the toxic brew being stirred in the midst of our worldwide economic catastrophe. As I have previously warned in my earlier blog comments regarding Ben Bernanke and quantitative easing, the Fed has now officially announced that it will fire up the printing presses and conjure out of thin air $1.2 trillion of freshly minted fiat currency, which it will utilize for purchasing Treasury bonds and mortgage-backed securities. This is an act of desperation, devoid of any long-term strategic framework. In a panic to achieve a short-term reversal of economic fortunes in the U.S., the all-powerful Federal Reserve has embarked upon an experiment in quantitative easing and government debt-monetization that will inevitably unleash the dangerous prospect of hyperinflation. Defenders of the Fed’s reckless gamble with America’s fiscal and monetary health will argue that currently deflation is a much greater danger than hyperinflation. This is accurate only in a very short-term time horizon. If anything, the Global Economic Crisis has shown how powerful financial and economic currents can be turned around on a dime. Last summer, the price of oil skyrocketed, reaching levels of nearly $150 per barrel, with serious financial analysts projecting a much higher price in the near future. Within a matter of weeks, the world witnessed a radical reversal in the price of oil and other commodities. I mention this as a warning that disastrous policy measures being enacted by the Fed can transform deflation into hyperinflation much more rapidly than can presently be envisioned.

Between news bulletins concerning the IMF and World Bank reports that are forecasting the most severe global economic contraction in 60 years, and the $1.2 trillion in make-believe money being manufactured by the Fed, it is inexplicable why major stock markets are undergoing a rally of sorts. Could this be the calm before the storm?

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The brief reassurance from Bernanke that the Fed’s printing presses were contributing most of the bailout money being injected into Wall Street as opposed to taxpayers was the single most important revelation from the otherwise monotonous propaganda broadcast on 60 Minutes. For those familiar with technical terminology as applied to monetary policy, Ben Bernanke was indirectly conceding that America’s semi-private central bank was engaging in quantitative easing, on a massive scale.

What is quantitative easing? In essence, it is printing money. In other words, the Federal Reserve, by virtue of the congressional legislation that led to its establishment in 1913, has the sole power and authority to print U.S. currency, at will. At any time. Without congressional or even presidential supervision or consultation. In unlimited quantities. There are some of us that believe that the power to engage in unregulated quantitative easing by the Fed amounts to nothing more than legal counterfeiting. Yet, that is exactly what is going on at the Federal Reserve, and Ben Bernanke confirmed it, though the meaning of his admission was probably rendered opaque to many viewers due to the saturation of praise heaped on the intellectual acumen of Chairman Ben Bernanke.

Largely unseen by the American public, their nation’s Federal Reserve is engaged in a massive expansion of the U.S. money supply. No one outside the Federal Reserve knows all the details, probably not even President Barack Obama. But it must be in the hundreds of billions of dollars, and perhaps in the trillions.

Not only is this manufactured money being used to recapitalize Wall Street firms and cover AIG payments to counter-parties; it may be the means by which the Fed and Treasury Department collaborate in covering the cost of America’s massive and never-ending budgetary deficits. As foreign sources of credit dry up in the midst of the Global Economic Crisis, the Treasury Department seems to be working with the Fed to monetize the debt. This is in essence a Bernie Madoff form of national finance. The U.S. Treasury Department sells its Treasury bonds to the Federal Reserve, and in return receives the output of the Fed’s printing presses.

What is so dangerous about the path that Bernanke seemed to hint at during the 60 Minutes profile of him is that the inevitable outcome is hyperinflation. In fact, behind the scenes, a growing number of expert economists are suggesting that the accumulating national debt of the United States will be so titanic in scope due to the multi-trillion dollar annual deficits the Obama administration is planning for years to come, the only means of rendering such a debt burden sustainable will be to use inflation as a tool to significantly erode its real value.

This approach, in a word, amounts to hyperinflation. It is a road to fiscal calamity, being cheerfully mapped out by Ben Bernanke and company. If anyone still thinks Bernanke’s path will lead to economic recovery, just look at the German Weimar Republic of the early 1920s or Mugabe’s Zimbabwe of today, to comprehend how bad an idea this really is.

Perhaps it would have been best not to have had Ben Bernanke and the Federal Reserve propagandized on 60 Minutes. Far from being reassured as to the competence and skill of the men of destiny leading the U.S. economy, I am even more convinced that the outcome that awaits the U.S. economy is not a happy one. Perhaps this is what Chinese Premier Wen meant when he suggested at his recent news conference that he was worried about the safety of China’s investment in U.S. Treasuries. If the Fed is planning to engineer hyperinflation through quantitative easing and debt monetization, China’s trillion-dollar investment in U.S. public debt could loose most of its value. However, China won’t be alone. As history has shown time and again, a nation’s middle class and many of its wealthy citizens stand to loose much of the real value of their assets denominated in currency undergoing quantitative easing.

Does anyone serving in the U.S. Congress actually understand what the Federal Reserve is planning for the U.S. economy?

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Premier Wen is a little bit worried about the solvency of the U.S. government? If he is only a little worried, at least in public, we should all be massively terrified. The reason Wen’s understatement of China’s deepest fears is more than noteworthy is that he would not have made such a comment at a news conference, heavily covered by the world’s new media, unless it was reflective of the high level of anxiety permeating the Chinese leadership over the future fiscal health of the United States.

China has invested heavily in U.S. public debt. Clearly, the American government could not have funded its extensive public deficits over the past several years without the Chinese appetite for U.S. Treasury bills. And, until the advent of the Global Economic Crisis, it seemed like a good deal for China. Invest in the credit worthiness of the U.S. government, while subsidizing the debt-ridden American consumer to purchase more and more Chinese made goods, in the process stimulating the growth of the export-driven Chinese economy. That model, it would appear, does not seem to function in the midst of a synchronized global recession. However, there are probably more concrete reasons for Wen’s expression of “worry.”

China’s Ministry of State Security manages one of the largest and most effective intelligence gathering and espionage agencies on the planet. The primary target of the MSS in recent years has been economic data pertaining to the United States. Through a network of thousands of front companies and hordes of travelling businessmen, students, scholars and diplomats, the MSS has undoubtedly, with painstaking effort, put together a picture of the U.S. economic outlook which is both more accurate and more chilling than what is to be found on the pages of the Wall Street Journal or on the website of Bloomberg.com. What I think has prompted Premier Wen to utter such an uncharacteristically candid expression of doubt regarding the safety of China’s massive financial investment in the United States was a most recent intelligence briefing provided to Beijing’s top leadership.

What would that briefing have told the Chinese ruling elite? Obviously, I do not know for certain. However, this is my speculation. The most carefully guarded secrets in the United States, at present, are not those involving the launch codes for nuclear missiles or other military matters. Rather, they involve the confidential activities of the Federal Reserve and Treasury Department in their response to the Global Economic Crisis. It is being increasingly recognized that most of the U.S. banking sector is insolvent and being kept on life support through the massive injection of money by the Fed and Treasury Department. However, those two entities refuse to disclose which institutions are being paid, and how much is being allocated to each one. It is also not being openly disclosed how much fiat currency is being run off the printing presses of the Federal Reserve. However, the figures announced regarding guarantees by the Federal Reserve and Treasury for backstopping the losses and toxic assets of the American banking and financial sector have probably topped ten trillion dollars. Despite the massive borrowing by the U.S. government, the projected deficits and national indebtedness do not come even close to fulfilling the obligations that have been undertaken by the Federal Reserve and Treasury Department. What therefore seems to be happening is quantitative easing by the Fed. In effect, the Federal Reserve is simply manufacturing paper money out of thin air to “purchase” government debt, and in turn the U.S. Treasury is injecting the increased money supply into the banking sector.

If the above scenario is accurate or even close to reality, the U.S. dollar will eventually erode precipitously in value. Once that happens, China’s one trillion-dollar investment in U.S. government debt is toast.

You bet Wen Jiabao and the entire Chinese leadership are worried over the safety of their U.S. investments. Not only worried; they are terrified, as we all should be.

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