The American Century

Ask yourself this – Why did the Fed announce QEII NOW?

You may think as I and many others do, that QEII is madness. It risks not only the long term health of the dollar, but more immediately is also doing deep, lasting and irrevocable damage to the international order in which America is pre-eminent. In my opinion, QEII will come to be seen as the moment when that order, already damaged, began to disintegrate.  So WHY did they do it and why did they do it now?

Think back to the Euro bail out and ask the same question. Greece is the easy answer.  There was a clear and present threat to the stability of the major European banks and those in power had already decided that they were going to save those banks and their bond holders, no matter what.  You and I may not agree with it but we can see the clear line of their logic.

What was the clear and present crisis that prompted the Fed’s QEII?

Was the stock market plunging? no.  Had unemployment lept up? No. House prices lurching down? No.  The value of the dollar shooting up or the value of Yuan plunging? Neither. Another war? Not yet.  So what was it?

You see, just because I think, and you may too, that the policies being followed by the Fed and the financial class whose interests they represent, are catastrophically wrong,  doesn’t mean they are actually stupid people.  They are clever people following a stupid idea. They would have been able to see the damage QEII was going to inflict on America internationally, yet they chose to go ahead.

I don’t think they truly appreciated, and still don’t, the real extent of the catastrophe they are bringing on themselves, but they would have known there were going to be consequences.  It is silly to think they wouldn’t. So to understand their actions, we need to ask what had these clever people seen that meant they were willing to accept the consequences of QEII?

This question is what I was getting at in the Gathering Storm parts 1 and 2.  According to the financial Pravda, there is no crisis in America.  QEII says there is and that it is upon them.

In short, the crisis is that America, with all its vast resources, is running out of money.  This may seem preposterous and I agree it is. That such a wealthy country could so impoverish itself is utterly preposterous. And yet that is what the wealthiest 1% of America have done to those they care nothing for – the rest of America.

America is running out of money in three places simultaneously. Their big banks are about to face another ruinous collapse of asset values.  The American State itself is running out of creditors willing to buy the open arterial flow of debt pouring out of the Fed. And lastly America is running out of money to pay for its military empire.

Each of these is contentious, I know. So let me offer my argument for each in turn.

America’s big banks may claim to have weathered their losses and emerged on the other side of the storm, but they have not.  This summer was the eye of a storm which is now gathering  far more destructive energy than it has ever had.  I will return to this later.

The US banks have NOT written down the bulk of their asset depreciation.  They are still massively exposed to two categories of losses in particular: Commercial real estate and Helocs.  Both of these categories have been kicked down the road several times mostly by means of mark to model accounting and by ultra low interest rates from the Fed.

Kick-the-can puts things off but does not solve them.  Real recovery was supposed to have started by now allowing the kicked can to be finally dealt with. There has been no growth in the real economy to speak of. And yet the can is now at their feet and may not be able to be kicked much further.

The banks need cash flow and that is what the legal conflagration of fraudulent securities and log jammed foreclosures is cutting off.  The banks are going to need either a new flow of money, which foreclosures are not going to deliver to them in time, or they need another large bolus of bad debts taken off their hands. Or both at once.

That means the Fed has to buy them. But the Fed has its own problems. Problems which are on a collision course with those of the banks.  The banks need the Fed to buy. The Fed, however, has to get the money to do that buying from somewhere and it is no longer forth-coming from the usual creditors.

America is still selling its bonds.  In fact, as concerns over Europe rise again it will have no problem selling them. BUT selling bonds doesn’t mean that the rates can be kept quite as low as they have been.  The Fed has been buying a huge percentage of US bonds.  It will soon be the largest holder of US debt surpassing even China.  The ONLY reason to do this is to make absolutely sure not only that the debt is sold but that the rate on long term debt especially, stays as low as possible.

Without the Fed’s buying long term debt (which foreign buyers are less keen on) it is likely that the rate on critical longer term debt would be creeping up. Not by much but by enough to be a critical sign that the Fed cannot hold the line on low rates. And at this moment perception and confidence is paramount.

The Fed and America itself CANNOT allow the rate to move at all. They cannot allow any doubt to germinate about America’s ability to find creditors and its ability to keep the rate it pays unwavering. For everyone knows that those countries which are most in debt – America and Japan – are most vulnerable to any increase in the rate they have to pay.

America’s banks rely on that low rate for their survival. and so, in turn does the entire US housing market and the recovery which is tied to it.   A rise in the rate the Fed has to pay, would push up rates on mortgages and the Big bank’s own funding, which would start a chain reaction of failure and collapse. America has to keep rates down, which means the Fed must be funded and ready to soak up the debt which is going to hose out of the Fed into the market next year.

The last point may seem an unusual one for me to bring up. Especially as it is difficult to imagine America not affording its military empire. But America is facing cuts like every other nation. And the cost of America’s foreign empire is vast.   America has well over 800 military bases across the world outside its own territory. The Pentagon on its own is one of the world’s largest landowners, over 600 000 acres world wide, over 29 million acres if you include its holdings inside America.

Recently the U.S. has been trying to get the host countries to help pay for its bases on the grounds that those bases are there to help protect the host nation.  So far negotiations are not a sparkling success. Neither have Clintons’ calls for allies to take a larger share of military costs. Which seems reasonable until you add in that the US wants to retain control over the decisions –  We alone decide, you help us pay.  Of course the U.S. will afford whatever military it wants, but that is not the point. The point is, affording it has to be seen to be effortless. Anything less will be perceived as the first sign of decline. Which is exactly what it is.

America has been pre-eminent. And there have been two parallel arms to this projection of supreme power: financial and military.  America has run vast debts thanks to being the world’s reserve currency. That has allowed it to spend and consume, to export inflation and to play too-big-to-fail with its own debt. The implosion of its banks has crippled all these measures of its power.

America is no longer perceived as financially supreme. The most frightening thing about this recession for America’s elite, is that the world is getting on without America. Not getting on well. But not dying either. Other countries are exporting, trading, deciding they will not slavishly follow whatever America tells them to do with their currencies or their economy. America’s consumers are not consuming and the world is still going. China and Asia are rising to be the new consumers of first choice.

Perhaps the American consumer is not essential? Perhaps the dollar doesn’t have to be the reserve currency? Not long ago such questions were almost impossible to imagine. How long before someone asks, What if, America itself, is no longer required?  What if we could begin to imagine a world not bought, sold and dictated to in dollars? That these questions are being thought is the real legacy of the first part of the financial storm.

If there were to be questions about America’s military invulnerability and ability to project power when and where it chooses that would cripple the other arm of American power. And I think those questions are germinating. There came a time when Rome could ill afford its legions.