Global Economic Crisis

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?

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?

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.