In this article I lay out precisely why the coming Crisis in Europe will be THE Crisis I’ve been forecasting for the last 24 months, why it will have dire consequences on the U.S. and why the Fed can do absolutely nothing to stop it this time round. Words: 1334
So says Graham Summers (www.gainspainscapital.com) in edited excerpts from his original article* (which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.)
Summers goes on to say, in part:
Over the last two years I have believed a Crash was coming several times – in some ways I was right as we got sizable corrections of 15+% – but we never got the REAL CRASH I thought we would because the Fed stepped in. This time is different for the following reasons:
- The Crisis coming from Europe will be far, far larger in scope than anything the Fed has dealt with before.
- The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this is an election year).
- The Fed’s resources are spent to the point that the only thing the Fed could do would be to announce an ENORMOUS monetary program which would cause a Crisis in [and] of itself.
Let me walk through each of these one at a time.
Regarding #1, above, we have several facts that we need to remember. They are:
- 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 at Lehman Brothers leverage levels.
- The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).
- 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).
- Over a quarter of the ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)
What we are talking about above is:
- a banking system that is nearly four times that of the U.S. ($46 trillion vs. $12 trillion)
- a banking system with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and
- a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1 – and
- all of this is occurring in a region of 17 different countries none of which have a great history of getting along [and] at a time when old political tensions are rapidly heating up.
As bad as the above points may be, they don’t even come close to describing the REAL situation in Europe. Case in point, regarding leverage levels, PIMCO’s Co-CIO Mohammad El-Erian (one of the most connected insiders in the financial elite) recently noted that French banks (not Greece or Spain) currently have 1-1.5% capital relative to their assets, putting them at leverage levels of nearly 100-to-1. That’s France we’re talking about [here]: one of the alleged key backstops for the EU as a whole.
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To be clear, the Fed, indeed, Global Central Banks in general, have never had to deal with a problem the size of the coming EU’s Banking Crisis. There are already signs that bank runs are in progress in the PIIGS and now spreading to France…
I want to stress all of these facts because I am often labeled as being just “doom and gloom” all the time but I am not in fact doom and gloom. I am a realist – and EU is a colossal mess beyond the scope of anyone’s imagination. The World’s Central Banks cannot possibly hope to contain it. They literally have one of two choices:
- Monetize everything (hyperinflation)
- Allow the defaults and collapse to happen (mega-deflation)
If they opt for the first point above, Germany will leave the Euro. End of story. They’ve experienced what comes from rampant monetization before (Weimar) so even the initial impact of a massive coordinated effort to monetize debt would be rendered moot as the Euro currency would enter a free-fall, forcing the US dollar sharply higher which in turn would trigger a 2008 type event at the minimum.
Moreover, we need to consider that the Fed is now so politically toxic that Ben Bernanke is literally going on the campaign trail to attempt to convince the American people that the Fed is an honest and helpful organization. Put another way, there is NO CHANCE the Fed can announce a large-scale monetary policy unless a massive Crisis hits and stocks fall at least 15%.
Regarding # 3, above, if the Fed were to announce a new policy it would have to be:
- MASSIVE, as in more than $2 trillion in scope. Remember, the $600 billion spent during QE 2 barely bought three months of improved economic data in the U.S. and that was a pre-emptive move by the Fed (the system wasn’t collapsing at the time). [As such,] given that the Fed will only be able to announce a large scale program in reaction to a Crisis, whatever it did announce would have to be ENORMOUS - a kind of shock and awe - attempt to rein in the markets.
- THE LAST QE the Fed could hope to ever announce as political outrage from the ensuing Dollar collapse and inflationary pressures would likely see the open riots and/or the Fed dismantled (this has happened twice before in the US’s history).
In simple terms, the Fed’s hands are tied until a huge Crisis hits and then, if the Fed acts it’s going to have to go “all in” with a massive program. If it does, we will still experience a Crisis, as the Dollar would collapse pushing inflation through the roof as well as interest rates (which in turn would destroy the banks as well as the U.S. economy).
|European Union||$16 trillion|
|United States of America||$14.5 trillion|
|European Central Bank||$3.8 trillion|
|US Federal Reserve||$2.8 trillion|
|United Kingdom||$2.2 trillion|
|Banking System||Total Assets||Total Assets Relative to GDP||Total Assets Relative to Central Bank Balance Sheet|
In simple terms, this time around, when Europe goes down (and it will) it’s going to be bigger than anything we’ve seen in our lifetimes and this time around the world Central Banks are already leveraged to the hilt having spent virtually all of their dry powder propping up the markets for the last four years.
Again, this time it is different. I realize most people believe the Fed can just hit “print” and solve everything, but they’re wrong. The last time the Fed hit “print” food prices hit records and revolutions began spreading in emerging markets. If the Fed does it again, especially in a more aggressive manner as it would have to, we would indeed enter a dark period in the world and the capital markets.
The above is not Doom and Gloom, it is reality…
*http://gainspainscapital.com/?p=1601 (To access the article please copy the URL and paste it into your browser.)
Editor’s Note: The above article has been has edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
On the surface things may appear to be calm, but I don’t think the European crisis is anywhere near its conclusion. Losses still have to be taken from Ireland, Spain, Portugal and possibly even Italy…There are a number of ways out of Europe’s problems. One of them is higher inflation…[which] is going to be very positive for gold… because the central banks will be under pressure to print.
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 - devolution.] Words: 1520
One of the problems with the debate over the “national debt” is that there’s no generally agreed upon definition of that term. Is it what the federal government owes, or what it owes foreigners, or what the whole country, private and public sector together, owes? Does it include off-balance-sheet items and contingent liabilities? There’s a hundred-trillion dollar gap between lowest and highest on this spectrum, which allows each commentator to confuse the rest of us by picking the measure that best suits their point of view. [Let's try to decipher the true state of the nation.] Words: 1468
The definition of insanity is to continue doing something that goes wrong, without contemplating that there could be a different course of action…[and we] are heading deeper and deeper into insanity…we are just getting deeper and deeper into problems leaving our children and grandchildren with loans that could well take decades to finish (paying) off. I fear we are now stoking up the conditions, at some point in the future, for serious inflation.
With the U.S. election just nine months off, political pressures will mount to favor fiscal stimulus measures instead of restraint. Such action can only accelerate higher domestic inflation and intensified dollar debasement culminating in a Great Collapse – a hyperinflationary great depression – by 2014. [Let me explain why that is the inevitable outcome.] Words: 2766
Today’s western financial world operates much like government-sponsored medical systems. Mask the problem and give the bankers the pharmaceutical drugs (bail out money) to help them dull the pain and keep them on life support. Letting the free markets work in curing the ailment is not an option because then there would be little need for doctors (governments) or the manufacturers of these drugs (central banks). The banks are sick and should be allowed to pass on…so the virus known as debt does not affect the rest of the population. Unfortunately, the governments and central bankers have only one prescription drug of choice to keep them alive [and that seems to be the supposed cure-all of] printing money… [Let me explain further.] Words: 970
Currency wars arise when a country steals growth from trading partners by cheapening its currency to promote exports. The new currency war began in 2010 when President Obama declared in his State of the Union address that it was the policy of the United States to double exports in five years. Since the U.S. would not become twice as productive in five years, the implication was the U.S. would severely cheapen its currency to achieve this goal. [Let me expand upon this.] Words: 666
The economy is now so manipulated by politicians, big bankers, and special-interest groups that making sense of the markets has become an almost impossible feat. Which is to say, it must push even harder on the levers of its printing presses, further setting the stage for the massive period of inflation we continue to see as inevitable… and for a stunning rise in interest rates. Words: 968