Just in his first round of quantitative easing (money printing), launched soon after Lehman Brothers collapsed in September 2008, Fed Chairman Ben Bernanke increased the nation's monetary base (cash and reserves in the banking system) from $850 billion to $2.1 trillion.
That was an insane increase of 2.5 times in just 18 months — by far, the greatest monetary expansion in U.S. history.
To get a sense of its sheer enormity, consider these facts:
Fact #1. Before the Lehman Brothers collapse, it had taken the Fed a total of 5,012 days — 13 years and 8 months — to double the monetary base. In contrast, after the Lehman Brothers collapse, it took Bernanke's Fed only 112 days to do so. In other words, he accelerated the pace of bank reserve expansion by a factor of 45 to 1.
Fact #2. Even in the most extreme circumstances of recent history, the Fed had never pumped in anything close to that much money in such a short period of time. For example, before the turn of the millennium, the Fed scrambled to provide liquidity to U.S. banks to ward off a feared Y2K catastrophe, bumping up bank reserves from $557 billion on Oct. 6, 1999 to $630 billion by Jan. 12, 2000.
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At the time, that sudden increase was considered unprecedented —$73 billion in just three months. In contrast, Mr. Bernanke's money infusion in the 112 days after the Lehman collapse was 14 times larger!
Similarly, in the days following the 9/11 terrorist attacks, the Fed had rushed to flood the banks with liquid funds, adding $40 billion through Sept. 19, 2001. But Mr. Bernanke's post-Lehman flood of money was twenty- five times larger.
Fact #3. After the Y2K and 9/11 crises had passed, the Fed promptly reversed its money infusions and sopped up the extra liquidity in the banking system. But after the Lehman Brothers collapse, Mr. Bernanke did precisely the opposite: After he doubled the currency and reserves at the nation's banks with his 112-day money-printing frenzy immediately after the Lehman failure, he and his successor, Fed Chairman Yellen, continued to throw even more money into the pot.
Total to date: Over $4 trillion.
Fact #4. With no past historical precedent, no testing, and no clue regarding the likely financial fallout, Bernanke and Yellen invented and deployed more weapons of mass monetary expansion than all prior Fed chairmen combined.
The list of new Fed programs boggles the imagination: Term Discount Window Program, Term Auction Facility, Primary Dealer Credit Facility, Transitional Credit Extensions, Term Securities Lending Facility, ABCP Money Market Fund Liquidity Facility, Commercial Paper Funding Facility, Money Market Investing Funding Facility, Term Asset-Backed Securities Loan Facility, and Term Securities Lending Facility Options Program.
None of these existed earlier. All were new experiments devised in response to the debt crisis.
Trashing the Past
Back in 1792, with the passage of the Coinage Act, Treasury Secretary Alexander Hamilton established the dollar as America's national currency.
Then, in the 218 years that followed, the United States overcame multiple obstacles, crises and disasters — one pandemic, two great depressions, 11 major wars, and 44 recessions. Four U.S. presidents were assassinated while in office. Hundreds of thousands of businesses went bankrupt; tens of millions of Americans lost their jobs.
Did the U.S. government respond to many of these events with countermeasures? Of course. In the wake of each disaster, there were, to be sure, monetary and fiscal excesses. But never once had the U.S. government resorted to such extreme abuses of its money-printing power as it did in 2008-10. Now, all that tradition of leadership and discipline was abandoned — all for the sake of perpetuating America's addiction to spending, borrowing, and speculative bubbles.
I was not the only one who shouted these warnings from the rooftops. Others, more prominent than I, also raised their voices in protest.
Thomas Hoenig, chief of the Federal Reserve Bank of Kansas City and one of the lone dissenters in the Fed's Open Market Committee, was among the most prominent. He saw three possible pathways for our nation's fiscal and monetary policy:
Path #1 — Monetize. The government runs massive deficits and borrows without restraint. At the same time, the Federal Reserve monetizes the debt, financing it by running the nation's printing presses. This is the path of least resistance for politicians and of greatest danger to the nation. Yet, unfortunately, as evidenced by the explosion in the monetary base illustrated above, it was also the speedway down which the Fed was racing.
Path #2 — Policy stalemate. As in path No. 1,the government runs massive deficits and borrows with little restraint. But the Federal Reserve refuses to finance them. Instead, the Fed lets the natural supply and demand for debt drive interest rates higher. Soon, the government finds it is too expensive — or nearly impossible — to borrow. And ultimately, Washington has no choice but to slash spending despite any near-term consequences. Hard to believe? Perhaps. But this is precisely what happened to many governments around the world in 2010 — not only in Greece, Ireland and Spain, but also in California, Arizona, New Jersey, Massachusetts, plus scores of other state and local governments in the United States.
Path #3 — Austerity and fiscal discipline. The government takes strong pro-active steps to reduce the deficit. This is, of course, extremely tough politically. But unless pursued promptly and aggressively, the government winds up forced to do it anyhow — albeit with more urgency and greater trauma for the country and its people.
These are three stark choices Hoenig set forth. Meanwhile ...
David Walker, former head of the U.S. Government Accountability Office (GAO) and president of the G. son Foundation, fears a Greece-like Armageddon for the UnitedStates. One of his main arguments: The nation's fiscal disaster, no matter how horrible it may be based on the official numbers, was actually far worse than advertised. His own words:
"The Greeks engaged in a variety of creative accounting practices, and there were a lot of big and bad surprises that caused this situation to arise. The U.S. has [also] been engaged in a lot of creative accounting for years with regard to the Social Security trust funds ...
"[And] now, we've got major creative accounting going on with government-sponsored entities Fannie Mae and Freddie Mac. We own a super-majority of them, but we're not consolidating them into the financial statements. We don't consolidate the Federal Reserve into the financial statements [either].
"The bottom line is: We're not Greece. But we could end with the same problems down the road if we don't get spending under control and start dealing with our structure deficits soon."
J. Irving Weiss, my father, who later founded our Sound Dollar Committee, had probably the greatest impact of all on the public awareness of these dangers. The big difference: That was over a half century ago.
In 1959, he launched a national, grassroots campaign that prompted an estimated 11 million Americans to demand an end to federal deficits. And he helped President Eisenhower pass the last truly balanced budget — without creative accounting — in our nation's history. In the New York Times and Wall Street Journal ads that launched our Sound Dollar Committee's campaign in 1959, Dad warned about the future dangers:
"Inflation is a narcotic. It soothes and exhilarates while doing its deadly work. Already it has reduced our dollar to half of its purchasing power. It is the killer rampant in our midst, threatening to destroy us as it has other countries whose rulers thought they could have a little bit of controlled spending and inflation; a little cheapening of their money. THEN IT WAS TOO LATE. "Deficit spending [and inflation] are the twin poisons which are undermining your future. Some people say we need deficit spending by our governments for prosperity and growth. But they forget that the means can destroy the end."
Back in those days, like today, inflation was not perceived to be an imminent threat. But those who ignored it later lived to regret their complacency. And like today, Dad was certainly not the only one raising his voice in protest. Also widely quoted in the Sound Dollar Committee's campaign were his associates, supporters, and other contemporaries, including:
Bernard Baruch, adviser to U.S. Presidents Woodrow Wilson, Franklin D. Roosevelt and several others, wrote: "Inflation flows from the selfish struggle for social advantage among pressure groups. Each seeks tax cuts or wage raises for itself while urging the others to make the sacrifice and with little regard for the national interest."
Yet, despite all these voices and despite all this history, our government officials have continued to pursue their stimulus, bailouts, guarantees and money printing. They said it was all for a good cause — to save the world from another great depression.
But it has obviously reached levels that are beyond reason, and it still faces serious obstacles to success.
Government Debt is Too Big and Growing Too Fast
First and foremost, America's burden of government debt is far too big. This year, at the end of the first quarter the U.S. Treasury owed $13 trillion, other government agencies owed $7.9 trillion, while municipal and state governments owed another $3.7 trillion.
As of March 31, 2015, for every dollar of Treasury debt in the United States, there was $3.5 of non-Treasury debt. And overall, including both public and private debts, there were more than $59 trillion in interest-bearing debts in the United States — mortgage loans, credit cards, corporate debt, municipal debt, and federal debt.
The federal government had contingent liabilities of at least $60 trillion in the form of commitments for Social Security, Medicare, veterans benefits and more.
Plus, commercial banks held another $220.4 trillion in side bets called "derivatives."
If you add up all the forms of debt, how big was the overall debt monster? At least $339 trillion in the United.States alone!
The numbers are not directly comparable, but just to give you a sense of the magnitude of the problem, that's 484 times more money than what was budgeted for the highly controversial $700 billion bailout package signed so hurriedly into law by President Bush in late 2008.
Still, most people believed that if Fed Chairman Yellen could continue to just gingerly raise interest rates to exit the extreme easy money trap ... if foreign central banks could do the same ... and if all central banks could just avoid the mistakes they made in the 1930s ... they could avoid another crisis, continue to create millions of new jobs and keep the U.S. economy growing.
Raising the Money
The second big obstacle governments ultimately face is huge federal deficits and the task of raising the money to fund bailouts. Apparently, in the rush to spend, lend or guarantee trillions of dollars, no one in government bothers to seriously consider the simple question, "Who's going to pay the bill? Where are we going to get all that money?" The government had only two choices: to borrow the money or print the money. More big debts and more big dangers.
As long as foreign money — from China or from the world's hardest hit trouble spots — continues to pour in to help finance the deficit and boost the U.S. economy, even massive deficits can be swept under the rug. But ultimately, to raise the money, the government has little choice but to shove aside consumers, businesses, and other borrowers; hog most of the available credit for itself; and then, adding insult to injury, bid up interest rates for everyone.
Some people hoped the government's resources, by some feat of magic, might be unlimited. But the reality is that there is no free lunch; someone has to raise the money and pay the bills. And as soon as the bills come due, the consequences could strike swiftly — in the form of steeper mortgage rates, higher credit card rates, or worse, virtually no credit at all.
Washington will try to encourage consumers and businesses to borrow more, spend more, and save less, but they will be very reluctant to do so.
Washington will prod bankers to dish out more credit, but the Fed's own surveys show that banks all over the United States do precisely the opposite, continuing to maintain tight lending standards.
The government will continue to provide cheap money to prod investors to risk more of their money. But that merely creates another speculative balloon.
In each case, government officials instinctively realize that it's too much borrowing, too much spending, and too much risk-taking that ultimately gets them into trouble. But they ignore their instincts and do everything to encourage more of the same.
The Biggest Danger of All:
The Government Rescues Themselves
By 2015, anyone not blinded by greed could plainly see the sick cycle I told you about at the outset:
First, the government helps create a great asset bubble.
Next, the government-created bubble bursts under a dark cloud of hardship for millions of Americans.
And last, the government responds by creating still another asset bubble that's far more dangerous than the previous.
A one-time event? Hardly. In 15 short years, we'd already seen three — the tech bubble and wreck of 1997-2002, the housing bubble and bust of 2003-08, and the sovereign debt bubble of 2009-14.
So by this time, most savvy investors — and many average citizens — already know the drill. What they don't yet know is the answer to the biggest question of all: What's the end game?
Would the world's money printing presses run amuck, trashing any remaining value in paper currencies? Would major governments someday default on their debts, destroying the global credit system? Would our entire civilization crumble?
My answer: Such threats are certainly real. But the final outcome could be very different indeed. In fact, no matter how many tricks governments may play and no matter how wild this 21st century rollercoaster ride may get, there is also another possible outcome: austerity.
Austerity can come in many forms: Governments may impose austerity strictly in reaction to market-driven forces. Or they may do so proactively. Austerity may be imposed only after rampant inflation. Or it may come before. It could trigger deep social upheaval. Or the social reaction could be more limited and less disruptive.
But regardless of how austerity finally arrives, it cannot happen without sacrifice and a reduced standard of living. That's the hard reality experienced.
Greece, for example, finally bowed to unrelenting attacks from global investors and slashed 30 billion euros from its budget in three years.
Spain, also under massive pressure from investors, announced spending cuts of 15 billion euros, plus a 5% reduction in public worker wages.
Portugal embarked on a program to cut 2 billion euros this year alone.
Italy slashed 25 billion euros from its budget over two years.
Germany, supposedly the most robust of all euro-zone countries, had no choice but to follow a similar path — cutbacks of 85 billion euros by 2014.
And the UK implemented the deepest cutbacks of all — slashing its military and social welfare budgets at the same time.
For now most of that cutting is behind them. But in the future, in the wake of a bond bust, they may have no choice but to cut even more.
Will politicians in Athens, Madrid, Lisbon, Rome or Berlin cut enough to restore fiscal balance? Very doubtful. But even if they don't cut their spending by a penny — even if they simply fail to renew their stimulus programs — the impact could be severe.
They won't admit it, of course — much as they wouldn't admit that their earlier policies of spending lavishly were also a shock to the economy. But if you think Washington is guilty of bias, misleading information and outright cover-ups, wait till you see what Wall Street has done, the subject of my next article in this series, coming next Monday, July 13.
Good luck and God bless!
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.