Tuesday, April 3, 2012

Fed Will Be Powerless to Stop What's Coming

By Graham Summers
From the Scott Stantis archive at the Chicago Tribune.

Over the last two years, I’ve been caught into believing a Crash was coming several times. In some ways I was right: we got sizable corrections of 15+%. 

But we never got the REAL CRASH I thought we would because the Fed stepped in.

So what makes this time different?

Several items:

1)    The Crisis coming from Europe will be far, far larger in scope than anything the Fed has dealt with before.
2)    The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this isan election year).
3)    The Fed’s resources are spent to the point that the only thing the Fedcould do would be to announce an ENORMOUS monetary program which would cause a Crisis in of itself.

Let me walk through each of these one at a time.

Regarding #1, we have several facts that we need to remember. They are:

1)    According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans… the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.

2)    The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).

3)    The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).

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