Right now, the word is that after “quantitative easing, part 2” (ie, printing up money and giving it away to banks) is complete, there will be no more bags of free money. We’re going to start unwinding all the Federal Reserve actions which were designed to save us from utter economic collapse – and we’re going to do this because the Fed has finished rescuing us, all is well and so now we can stop doing it. And yet, rumors continue to persist that “quantitative easing, part 3” is coming. Graham Summers over at Zero Hedge thinks he knows why it will happen:
The reason that the 2008 debacle happened was very simple. The derivatives market, the largest, most leveraged market in the world.
Today, the notional value of the derivatives sitting on US banks’s balance sheets is in the ballpark of $234 TRILLION. That’s 16 times US GDP and more than four times WORLD GDP.
Of this $234 trillion, 95% is controlled by just four banks…
…The Fed HAS to continue pumping money into the system to support these firms’ gargantuan derivative exposure. Failing to do so would mean a disaster on the scale of four to five times that of 2008.
Remember 2008 was caused by the credit default swap market which was $50-60 trillion in size. The interest-rate derivate market is $200+ TRILLION in size…
The four banks are JP Morgan, Bank of America, Citibank and Goldman Sachs. I’m no financial expert; when I read up on derivatives what most struck me about them is their speculative nature – and thus their ability to distort true values. If someone has a way to explain how they are actually vital to the process of making, mining and growing things, I’m all ears.
While it might seem a bit absurd to state that there are $234 trillion dollars in derivatives out there, that does seem to be the case…which means we’ve speculated ourselves in to having financial instruments which exceed the monetary value of the world. We’re up to our eyeballs in financial risk which can only be accommodated as long as things don’t go wrong…such as a liquidity crisis leading to sovereign default in the European Union (not enough money out there for people to, say, actually buy the increasingly worthless bonds of Portugal so they can’t roll over their debt and thus can’t pay current bond holders who then dump all their Portuguese paper triggering a round of sell offs around the world, etc). How to avoid a liquidity crisis? Well, the best means is to not have more debt out there than you have assets to back it – but we’re waaaay the heck past that, already. So, the other way is just flood the market with money and hope that things don’t fall apart.
And, so, there is a strong argument that whether the Fed wants to stop printing or not, they’ll have to keep on doing it because the financial system is doomed unless they do. Of course, it is doomed if they do print, too. Eventually, all this money printing will destroy completely the value of the dollar and thus dollar-denominated assets will become worthless. That, in turn, would lead to all sorts of financial sclerosis – ie, the very crash the printing was supposed to prevent. We’re kind of stuck between a rock and a hard place here, my friends.
Does anyone out there (a) have any hope that we’ll just skate our way out of this or (b) have any suggestions about how we get out of it without pain? I just can’t believe in (a) and see no way for (b) to happen.