The Collapse Is Coming – What Happens When It Does?

A rather astonishing set of data from Zero Hedge, on the occasion of the Dow returning to its 2007 pre-crash levels…

Zitat

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To combat the Great Recession, the Fed has bought trillions of dollars of mortgage bonds and U.S. Treasuries to juice the housing market and the economy in general.

On balance these purchases — which go by the non-threatening name of “quantitative easing” — have been warranted, given the deep economic problems caused by the financial crisis. But the time is approaching to scale back the bond-buying spree and get ready to unwind some of the Fed’s massive portfolio, which now tops $3 trillion. The longer the policy lasts, the more likely it will end unhappily.

The Federal Reserve’s purchases have driven interest rates to near zero. This has stimulated the economy but not without cost. Savers, particularly older ones trying to live on income from their investments, are starved for safe options. They’ve been forced into stocks, which is one reason the market has been acting as if it’s on steroids. Further, with borrowing costs low, Congress and the White House have less incentive to rein in the national debt. Rock-bottom interest rates have also distorted markets.

The best indication that the Fed’s bond-buying purchases are pushing stocks up artificially is that investors run for cover whenever there is a hint that the Fed might change course, as happened recently. On Monday, billionaire superinvestor Berkshire Hathaway CEO Warren Buffett told CNBC that markets are on a “hair trigger” waiting for signs of change from the Fed. The market is “hooked on the drug” of easy money, Dallas Fed President Richard Fisher told Reuters.

Fisher’s comparison of Fed policies to a drug is apt. Markets might not like the idea of the drug being withdrawn now, when the Fed holds a portfolio of $3 trillion. But the withdrawal symptoms will be a lot worse once the portfolio grows to $4 trillion, or more.

No one has a clear idea how the Fed plans to unload such staggering sums. As it sells off its hoard, the value of all bonds could plunge, more than wiping out the small returns bond investors are getting. But holding onto the bonds as the economy stabilizes would set off inflation, which the Fed is required to combat.

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What USA Today won’t tell you is that the Fed’s bond-buying hasn’t averted a depression. We’re in a depression. It might not feel like one, because people aren’t starving in the streets or living in cardboard boxes. But the only thing keeping that from happening is food stamps for 50 million Americans, federal bureaucracy slowing down foreclosures. Free stuff from the government.

The economy isn’t growing. It’s dead. It’s being kept alive by the federal government spending money borrowed from the Fed at a practically-zero interest rate. Meanwhile the private sector is moribund; large companies make big profits but chose not to grow, and small companies are shrinking and dying. And there are no new companies.

And another downgrade is coming, because even though federal tax revenue is going to hit a record $2.7 trillion this year we’re still borrowing money like there’s no tomorrow. Those “draconian” sequester cuts don’t even make a dent in the federal deficit, and the ratings agencies know it.

So how does this play out?

We have a president whose response to the sequester is to let criminals out of prison, threaten to fire janitors on Capitol Hill, cancel deployments of aircraft carriers and threaten the jobs of cops and teachers the federal government doesn’t even pay. This from a “budget cut” which doesn’t even reverse the growth in government.

And it’s a lie anyway, as the federal government is still hiring. And spending $50 million on new uniforms for TSA officers who supposedly won’t be able to do their jobs because of the sequester.

President Obama refuses to govern. He’s busy playing politics instead. Shamelessly so. Brit Hume, on O’Reilly last night, hit the president’s behavior perfectly…



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The world economy is right now almost completely dependent on easy money from central banks. Meantime the Keynesian orgy that is the Chinese construction industry has begun to crumble, with their economy likely forfeit and a retrenchment inevitable.

A snippet from a Nouriel Roubini newsletter today re China (sorry, can't link to it)

The Myth of a Gradual Rebalancing and Soft Landing for China
By Adam Wolfe:

The consensus on China remains that it will be able to rebalance at only a moderately slower growth rate, something in the 7-8% range. History suggests that this will not be the case: 47 episodes of post-investment boom rebalancing show GDP growth slipping from a 6.3% compound annual growth rate (CAGR) in the five years leading up to the investment peak to 2.8% CAGR in the five years following. Chinese growth is likely to slow to 4.2-5.9% CAGR in the first five years of rebalancing, in line with RGE’s long-standing forecast for 4-6% growth after 2013. Moreover, according to our sample set, countries often experience an investment-led slowdown when the real income level reaches about 24% of the U.S.—China should reach this level by 2015, adding to warning signs in rapidly declining investment productivity and a rising debt stock. Lastly, growth accounting assumptions that underlie the more bullish forecasts for Chinese rebalancing appear to be problematic.