Bankrupt Fed
Ben Bernanke seemingly calmed the masses with power laden, majestic metaphors but it was a bluff. The Chairman’s candid chat was to convince everyone that there was indeed a mighty wizard behind the curtain, so powerful that proving his existence was entirely unnecessary. In reality it was a calculated effort to assuage enough angst so that he wouldn’t be forced to show how weak his hand really was; a poker bluff. There is little recourse left available to the Reserve at this point and high-stakes press conference bluff is worth a try. The disclosure was candid and offered even more insight as to just how precarious this situation is. Lowering interest rates may temporarily soothe the savage credit crisis but what about those who’re really holding the long-term cards?
Foreign owners of trillions in US Treasury debt are not the happiest of financial campers these days. They’re relative investment has lost money each time we issued more credit and they now have to step in to shore up the private banks with hard capital just to keep the Federal bank in business? Eventually this deal’s not going to hold that much appeal compared to more fiscally responsible bonds issued in many other countries.
It occurs to me that there is so little real money (GDP produced) to back things up that the most legitimate thing we can now offer is a foreign IOU. It also sheds light on why all the “real” bail out assistance has come from Asia and the Middle East – they have relatively hard currencies. Our creditworthiness is diminishing for good cause, mismanagement. We’d all have stellar credit if we could print all the money we needed or pay our IOUs with someone else’s IOUs. The billions “deposited” into the banking system, in the coordinated “infusion” of capital from European banks, turns out to be nothing but more credit. I guess it was legitimate because the Europeans are letting us loan them electric dollars, so that we can then deposit their electric dollars into our banking system and pretend it’s real. No cash - just another electronic ledger entry. Sounds more like a Dave Barry parody than the most sophisticated central banking.
Keeping the system together now has more to do with convincing our US Treasury holding, hard-currency foreign backers that we can keep the population producing enough so that they’ll continue to receive their next dividend check. Ben was reassuring us to reassure them as they face yet another decrease to their investment if it doesn’t sell. We’re painted into the same corner every other fiat banking system has worked its way into, printing fiat to cover excess credit. Aren’t we clever?
Even now as we enter a deflationary spiral, most are swimming in denial and rationalizing the gravity of the falls. The next leg to drop is even uglier than the one we are now pretending can be reattached with Federal Reserve Super Glue. Who thinks we’re in anything resembling a normal economic slowdown? The Feds are compelled to desperately create more credit, accept anything as collateral; pretend their own loans (made via foreign banks) are actually real capital and bluster about their vigilance and readiness; all because there is no more real money available, only more credit. We’ve gone all the way from backing our currency with something precious; to backing it someone else’s IOUs. What an embarrassing position for the once noble, once lone economic giant.
