*If Fed Chairman Ben Bernanke honestly believes what he said at Jackson Hole
on Friday — that he can save the economy by printing more money and buying
more bonds — he's hallucinating. *
Through the first quarter of this year, he printed $1.5 trillion of paper
money and promptly bought $1.5 trillion in mortgage bonds, government agency
bonds, and Treasury bonds.
But the entire effort was a dismal failure; the U.S. economy is still
sinking and most large American banks are still weak.
*The underlying reason: While the government has been borrowing massively,
nearly everyone else has embarked on unprecedented debt LIQUIDATIONS. *
In other words ...
*While Washington is gorging itself on new debts, nearly every other sector
is undergoing massive liposuctions. *
How do we know? Because that's what the Federal Reserve *itself* is
reporting — unambiguously and conclusively.
Based on the Fed's latest Flow of Funds
report<http://www.gliq.com/cgi-bin/[email protected]>(Table
F4, "Credit Market Borrowing"), governments are borrowing massively.
But the collapse in private sector credit is so dramatic that among ALL the
major categories the Fed tracks, NOT ONE is expanding its debts. Rather, *every
single sector is in advanced stages of unprecedented and massive debt
liquidations! *
**
Specifically, as you can see in the chart above ...
- Corporations are cutting back on their bonds at a record pace of $355
billion per year ...
- Banks are cutting back on their lending at the yearly rate of $273
billion, and ...
- Worst of all, mortgages are being liquidated at a record-smashing pace
of $560 billion annually.
-
In addition, the Fed is reporting net cutbacks in consumer credit ($39
billion), open market paper ($154 billion), agency bonds ($16 billion), and
other loans ($174 billion).
And remember: We're not just talking about a slowdown in the pace of
*new*borrowing — the pattern we used to see in typical recessions of
the past.
No! These are actual *net* reductions in debts outstanding — the basic stuff
that depressions are made of.
*In sum, nearly all the money Bernanke has printed — plus all the money he
has supposedly poured into the economy — is going nowhere, except perhaps
down the drain. He's clearly running on a treadmill ... pushing on a string.
*
Whatever you do, do not underestimate the potential impact of this
situation. It is ...
*Huge!* Including both the government and private sectors, the total new
credit created in 2007 was $4.5 trillion. Now, it's running at an annual
pace of about ZERO! That $4.5 trillion was LOT of money — and it's all money
that's NOT pouring into the economy any more.
*Unprecedented! *This has never happened before in modern times — not even
during the deepest recession of the postwar era. During the Great Depression?
Yes. But in proportion to GDP, the debt buildup *before* the Depression — as
well as the debt liquidations *during* the Depression — were not as large as
they are now.
**
*Getting worse! *Despite everything Bernanke has done to try to stop it, the
debt liquidations are accelerating — especially in the mortgage area.
Consider these basic facts:
**
*Back in 2005*, lenders issued $1.4 trillion in new mortgages over and above
those that were paid off or went bad — a fantastic amount of fresh new money
pouring into the housing and construction markets.
*But by 2008*, they had cut back their new mortgage lending by a whopping 94
percent. The industry virtually died — an unmitigated disaster for the
economy.
At that point, pundits assumed it was the end of the decline. On a net
basis, the creation of mortgages in the U.S. was practically down to zero.
"So how much further could it possibly fall?" they asked.
Meanwhile, Bernanke apparently assumed that, by buying crazy, unprecedented
amounts of mortgage bonds, he could somehow stop the decline — or at least
offset its impact. But the decline in the mortgage market didn't end there
in 2008 ...
*In 2009*, it got worse — a lot worse! Not only was new mortgage money
largely unavailable but OLD mortgage money was pulled out. Result: We saw
net mortgage *liquidations* of $283 billion!
*And for the first quarter of 2010*,* *as I highlighted earlier, the Fed
reports net liquidations running at an annual pace of $560 billion, the
worst in history.
*The Unavoidable Consequences *
These forces are more enduring than any monetary policy, bigger than any
government. They are unmistakable, unavoidable, and overwhelming.
Bernanke can try to make believe they don't exist. But you cannot afford to
take that risk. You must recognize the truth and consequences that he's not
talking about ...
*Consequence #1.* *Bernanke's nearly powerless.* No matter how many more
bonds he buys, Bernanke cannot save the recovery. Sure, he could push
30-year fixed mortgage rates down some more. But even the lowest mortgage
rates in recorded history haven't made a bit of difference. In fact, despite
low rates, mortgages are being liquidated at an even FASTER clip. Home sales
falling even MORE rapidly.
*Consequence #2.* *Double dip.* The double-dip recession we've been warning
you about is now on its way. Meanwhile, administration economists still
swear on a stack of Bibles that the double dip is not in the cards; and
private economists think the probability of a double dip is only 20 to 30
percent. They must be getting their hallucinogens from the same source as
Bernanke.
*Consequence #3. More bank failures!* As a whole, despite government
bailouts and regulatory reform, the nation's banks and thrifts are no
healthier today than they were before the onset of the debt crisis. The big
difference: This time the government is unlikely to have nearly as much
political or financial capital to bail them out.
*Do not believe Bernanke!* Given all the facts he has at his fingertips —
the same ones I've just presented here this morning — I doubt he even
believes himself.
*Safe Harbor Statement:*
*Some forward looking statements on projections, estimates, expectations &
outlook are included to enable a better comprehension of the Company
prospects. Actual results may, however, differ materially from those stated
on account of factors such as changes in government regulations, tax
regimes, economic developments within India and the countries within which
the Company conducts its business, exchange rate and interest rate
movements, impact of competing products and their pricing, product demand
and supply constraints.*
**
*Nothing in this article is, or should be construed as, investment advice.**
*
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