“Après moi le déluge”: the Fed build up of liabilities portends a coming tsunami

We continue to think about the world’s biggest ever story – indeed one could call it a civilisational one: the financial state of the West.

After 73 months of ZIRP yet another meeting at the US Fed has decided to extend the monetary largesse. The threat of interest rate rises was just that an empty threat: the biggest loser from such a policy would be the US (and all the other Western governments). Not only would their debts cost more, but they would undermine the “carousel” with the banks that has been set up to fund them. The moral of the tale is that you cannot taper a Ponzi scheme.

In a previous post [See; http://different-traditions.com/?p=2244], we examined Peter Warburton’s structural analysis of the post-1985 Western economic model: channel inflation through financial and related assets in order to fund Western government profligacy, rather than bring it to account through the operations of free markets that would see a flight to real assets as fiat currencies are devalued.

Part of this post-1985 stategy was that large bond buyers were allowed to borrow vast quantities of newly created money from the Fed at a fixed price, avoiding interest rate rises as increasing quantities of lending take place. The point is that it is all channeled back into the financial markets, and in particular into government bonds, making bankers rich and keeping Western government afloat. The only chink in the West’s armour was Europe. Southern Europe was going to take Germany down if the ECB didn’t join the party: now it has.

The whole point of this financial-economic strategy is that tickle down actually doesn’t work – must not work. This however, continues to be the justification for everything that is happening – the philosophy of our times as David Stockman says in his latest post – The Wreck of the Monetary Hesperus: “At the end of the day, there is nothing behind the curtain at the Eccles Building except for the specious doctrine of wealth effects.”


Stockman explains the role of the bankers we describe above, when he says: ” The reason that ZIRP is of exclusive benefit to financial gamblers is straight forward. No businessman in his right mind would fund equipment, inventories or even receivables with borrowings under a one-day or even one-week tenor. The risk of fatal business disruption resulting from the need to precipitously liquidate working assets if funding can not be rolled-over at or near the existing interest rates is self-evident… Likewise, no sane householder would buy a home, automobile or even toaster on overnight borrowings, either.”

Only monstrous portentous titles like the ones for this post, or Stockman’s post, will do when described what is going on, and what might happen. The only apparent limit to this Ponzi scheme is the ability of the US dollar, on which it is based, to continue to dominate world trade. It will take a little time for that to change, although this is in fact happening, not least because (astonishingly) the US government sees fit to undermine its own currency through liberal use of sanctions, for political reasons. There is another time bomb there, however, and that is the political one: how long can Western governments continue crushing their real economies under the weight of financial repression, and distorting them through the unprecedented manipulation of prices?

The Soviet Union fell for lesser crimes against economic logic.