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Synopsis of a report by financial analyst Martin Weiss:
If Fed Chairman Ben Bernanke honestly believes what he said at Jackson Hole on Friday -- that he can save the economy by essentially printing more money and buying more bonds -- he's "gone round the bend."
Consider the facts, Ben: Through the first quarter of this year, you and your Fed created $1.5 trillion of paper money and bought $1.5 trillion in mortgage bonds, government agency bonds, and Treasury bonds. And yet the entire effort was a dismal failure; the U.S. economy is still sinking and most large American banks are still weak.
The underlying reason for this sinking and this failure is this: While the government has been borrowing massively, nearly everyone else has embarked on unprecedented debt liquidations.
How do we know this? Because that's what the Federal Reserve itself is reporting -- unambiguously and conclusively.
Based on the Fed's latest Flow of Funds report, governments are borrowing massively. But the collapse in private sector credit is so dramatic that among ALL the major categories the Fed tracks, NOT ONE is expanding its debts. Rather, every single sector is in advanced stages of unprecedented and massive debt liquidations.
Specifically:
- Corporations are cutting back on their bonds at a record pace of $355 billion per year ...
- Banks are cutting back on their lending at the yearly rate of $273 billion, and ...
- Worst of all, mortgages are being liquidated at a record-smashing pace of $560 billion annually.
- Finally, the Fed is reporting net cutbacks in consumer credit ($39 billion), open market paper ($154 billion), agency bonds ($16 billion), and other loans ($174 billion).
And remember: We're not just talking about a slowdown in the pace of new borrowing -- the pattern we used to see in typical recessions of the past. No! These are actual net reductions in debts outstanding -- the basic stuff that depressions are made of.
In summary, nearly all the money Bernanke has created -- plus all the money he has supposedly poured into the economy -- is going nowhere except to reduce indebtedness and pile up in corporate coffers. In other words, from the point of view of benefiting the economy, it has been squandered and wasted. So Bernanke and the Fed are essentially running on a treadmill, accomplishing nothing that will help bring back the economy.
The potential impact of this situation cannot be underestimated. Here's why.
Including both the government and private sectors, the total new credit created in 2007 was $4.5 trillion. But now it's running at an annual pace of about ZERO! That $4.5 trillion was an immense amount of money -- and it's money that's no longer pouring into the economy.
Understand that this kind of reversal is unprecedented. This has never happened before in modern times -- not even during the deepest recession of the postwar era. During the Great Depression? Yes. But in proportion to GDP, the debt buildup before the Great Depression -- as well as the debt liquidations during that Depression -- were not as large as they are today!
And it's getting worse! Despite everything Bernanke has done to try to stop it, the debt liquidations are accelerating -- especially in the mortgage area. Consider these basic facts:
Back in 2005, lenders issued $1.4 trillion in new mortgages over and above those that were paid off or went bad -- a fantastic amount of fresh new money pouring into the housing and construction markets.
However, by 2008, lenders had cut back their new mortgage lending by a whopping 94%. As a result, the housing industry virtually died -- an unmitigated disaster for the economy.
At that point, pundits assumed it was the end of the decline. On a net basis, the creation of mortgages in the U.S. was practically down to zero. "So how much further could it possibly fall?" they asked.
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