What will happen if Europe goes bonkers with Barack Obama style flooding of the economy with printed money and zero rates? #1. Well, the big banks will receive the bulk of the stimulus ( printed dollars ) #2. Then, the money will be lent in the form of corporate, oligarchal loans for market and real estate development. #3. Then, when markets take a bath ( which they will ) these investors will panic and default on the loans. Hence, the big banks will see negative capital. When the big banks hiccup, we will get pneumonia...in the form of a market crash, devalued currency, housing bust, and soaring unemployment. You see, flooding the economy with money eventually renders the money worthless. Kind of like if you flooded your house with bananas....they become worthless and rot. A little more reading if you are not bored yet ;) Take Note: This outrageously gluttonous form of fiscal stimulus relegates us to living in a house of cards with quicksand foundation. A little QE history: The quantitative easing since 2008 has encouraged the top 4 US banks to take on so much risk, they have become systematically important....as in, their failure would end capitalism as we know it. The Too Big to Fail banks, have gobbled up the smaller more prudent banks ( but see, the smaller banks did not receive the trillions in QE ) Typical big government. Anyway, but more important is the erroneous understanding about deposits, which indicates a lack of understanding of how QE works. The 2.2 trillion dollar surge in deposits since Lehman is matched only by the 3.5 trillion surge in Fed created reserves. So, in other words, excess reserves appear on bank balance sheets as excess deposits, which are then used by banks to gamble away via speculation, deficit spending bond buying; loans to Russia, Latin America, China, etc, etc. The Problem: What happens to bank deposits once the Fed starts to really taper, ends QE or outright unwinds its balance sheet...WHICH ultimately would soak up Trillions from bank deposits. What if short term interest rates rise? The Piece de Resistance: Just the 4 biggest US Banks hold 217.5 trillion, or 93% of the 233.9 trillion in derivatives......YIKES ! You see, Keynesians think the printed dollar improves the economy, however they are dead wrong: Commerce is the true driving force of any economy. The FED balance sheet under Bush: 900 million. The balance sheet under Obama: 4 trillion. One little hiccup at the big 4...and we are toast. When rates rise just imagine the defaults that will occur at the big 4. Even scarier: imagine the popping of the bond bubble. That pop will burst your ear drums. The bond market is 3 times the size of the stock market. NOW, imagine if Europe does what we did??
Posted on: Sat, 31 May 2014 16:19:40 +0000
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