Monetary Madness, Part II

by Martin D. Weiss, Ph.D.,

In the chart below, just look at the relatively gradual slope of money growth in the 1990s and 2000s — before the Lehman Brothers failure. And bear in mind that even that “slower” pace was considered irresponsibly rapid by many experts.

Biggest money printing of all time

Next, look at the sudden explosion that began immediately after the Lehman Brothers failure!

That’s when the Fed threw all its old rule books into the East River. And that’s when the Fed flew off on a new, high-risk trajectory into the outer space of monetary policy.

Then, see how the Fed’s immediate response to post-Lehman crisis (QE1) was replicated not just once, but twice — with QE2 and QE3.

But the most alarming fact of all is this …

While the Fed has used crisis after crisis to justify its monetary madness, it has not yet begun to resolve the underlying diseases that gave rise to those crises. It has merely papered over their symptoms.

Hard to believe? Then take a quick look at each crisis one by one:

1. 2008 Debt Crisis:

Primary causes: (A) Excessive debts, (B) unwieldy high-risk financial instruments (derivatives), (C) unprecedented concentration of power in the hands of a few large institutions, and (D) unbridled speculation fueled by unnaturally low interest rates.

Current status: A. Excessive debts. According to the Federal Reserve’s latest Flow of Funds release (see p11), total credit market debt in the U.S. has not been trimmed down by one iota. Quite to the contrary, it has grown from $53.5 trillion in 2008 to $57.6 trillion at the end of the second quarter of this year.

B. High-risk derivatives. The latest quarterly report by the Office of the Comptroller of the Currency (OCC) (pdf page 13) shows that the total notional value of derivatives held by U.S. banks has also not diminished by one red cent. It has grown from $175.8 trillion in September 2008 to $231.6 trillion this year.

C. Concentration of power among largest institutions. The OCC also reports that “Derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions.” It documents how just four megabanks — JPMorgan Chase, Bank of America, Citibank and Goldman Sachs — control 93% of all derivatives in the entire banking industry.

D. Speculation fueled by unnaturally low interest rates. In the years leading up to 2008, the Fed pushed interest rates down artificially, stimulating the large housing bubble. After 2008, the Fed literally shoved them to the floor (near zero) and has kept them there ever since, stimulating an even larger bubble — in bonds.

2. Massive U.S. federal deficits:

Primary causes: Structural problems related to overspending and massive, impossible-to-fulfill commitments to Social Security, Medicare and other benefits.

Current status: Instead of real progress, we are witnessing a string of fiscal cliffs, debt ceiling debacles and government shutdowns. The deficit has diminished in size, but almost exclusively thanks to a recovery in the U.S. economy, which, in itself, is driven largely by the Fed’s wild monetary expansion.

3. The European debt crisis:

Primary causes: Overborrowing by weaker European Union members. Huge discrepancies in monetary and fiscal policy among Eurozone nations. Sprawling, burdensome welfare states in the largest, supposedly strongest, countries.

Current status: As in the U.S., the authorities have papered over the most blatant symptoms but done virtually nothing to resolve the underlying problems. France’s megabanks, larger than America’s giants, are especially vulnerable.

Bottom line:

Now it’s not just the economy that’s hooked on the $85-billion-per-month shot in the veins. Now, the Fed itself is hooked! Now, it’s the Fed that’s also trapped — with no way out, except one … Panic!

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