By John Galt
August 9, 2011 -10:45 ET
The economic circumstances which the Federal Reserve, Wall Street, and Washington, D.C. have been living in was shaken by the events of the past ten days thanks to the realization that both Main Street USA and Europe are in far worse condition than their delusional public statements indicated. Thus the crisis de jour has come upon their doorsteps and the reaction from Washington was to pass a new debt ceiling bill which does nothing to reduce the national debt over the next ten years and actually increases the deficit by over $7 trillion. Wall Street has acted shocked that the serfs are not happy with their economic lot and now questions the fundamental and technical condition of their precious rigged markets in a desperate attempt to stem any panic and keep the great Ponzi scheme intact. Lastly, the reaction of the Federal Reserve beyond lip service to date, is about to become public knowledge and despite the pronouncements of voodoo economists and talking heads, the options remain minimal in my opinion.
1. The Fed can engage in inflation targeting which means an expansion of the previous debt monetization to force prices upwards and encourage economic expansion. This solution failed in Argentina and Zimbabwe and to arrogantly think that it would succeed here is a pipe dream. The actual result would be the Weimarica solution I outlined back in 2007 which is basically printing to infinity with little impact on the average American but an opportunity to save the higher echelon financial institutions.
2. The Fed can attempt to jawbone the markets and reduce the interest rate it pays to banks holding cash with the Fed to zero to force them to put the money back into the economy.
3. They can attempt the belated Swedish Riksbank solution which should have been attempted in 2008. If they elected to go to a negative Fed Funds rate structure and move with the Treasury to nationalize those major insolvent institutions for liquidation, a crisis could be stemmed from accelerating in the next few months. It would require the Congress and the President to surrender even more powers to the Fed for a defined period of time but could save thousands of smaller institutions from failing if a deep recession were to occur. (Read more on this solution from the EU Economics Papers #360 from February 2009, The Swedish Model for Resolving the Banking Crisis of 1991-93)
In my opinion it will be a mix of 1 and 2 but in a light format without a visibly serious commitment to overwhelming the system because it would make them look foolish as they continued to predict a second half recovery as late as last month in many appearances on various financial programs by individual Fed representatives. Thus they will miss the opportunity to solve the crisis once and for all and it will intensify in the autumn creating a deeper recession than intended, but for the purpose of fundamentally changing the economy for the U.S. deep into the future.