What makes this time different?
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 is an election year).
3) 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 of itself.
Let me walk through each of these one at a time.
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).
4) 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)
So we’re talking about a banking system that is
nearly four times that of the US ($46 trillion vs. $12 trillion) 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… 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.
And that’s France we’re talking
about: one of the alleged key backstops for the EU as a whole.
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 (see El-Erian’s comments in the article
above).
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:
1) Monetize everything (hyperinflation)
2) Allow the defaults and collapse to happen (mega-deflation)
If they opt for #1, Germany will leave
the Euro. End of story. 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%.
Finally, regarding my third point… 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 US and that
was a pre-emptive move by the Fed (the system wasn’t collapsing at the time).
So 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.
Moreover, it would literally be 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 US
economy).
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.
Country
|
GDP
|
European Union
|
$16 trillion
|
United States of
America
|
$14.5 trillion
|
China
|
$5.8 trillion
|
Japan
|
$5.4 trillion
|
European Central
Bank
|
$3.8 trillion
|
Germany
|
$3.2 trillion
|
US Federal Reserve
|
$2.8 trillion
|
France
|
$2.5 trillion
|
United Kingdom
|
$2.2 trillion
|
Banking System
|
Total Assets
|
Total Assets Relative to GDP
|
Total Assets Relative to Central Bank Balance Sheet
|
Europe
|
$46 trillion
|
287%
|
1,210%
|
US
|
$12 trillion
|
82%
|
428%
|
This is not Doom and Gloom, this is reality.
No comments:
Post a Comment