As a matter of fact, the recent step taken by the Fed proves that, though they do not admit it, they are in fact beginning to realize that they are facing a problem of general insolvency in the US (and in the related countries, such as UK (1)), affecting the federal State, federated states, companies, banks and households. For this reason, they have started (2) buying the T-Bonds issued by the US federal government. Of course this is pure money creation and a clear signal that Washington is now compelled to pay its abysmal deficits by issuing thousands of billions of new Dollars. And of course it is only transferring the question of solvency onto the Fed whose balance sheet – already loaded with toxic assets bought from the banks in the past months – is thus downgraded by the purchasing of massive amounts of US T-Bonds otherwise lacking buyers (whatever the main financial media may say). There is indeed no reason why the Fed would have to buy US T-Bonds if other buyers were available. In fact the general context prompts to suspect that the Fed has been buying US T-Bonds for some months already, through its « Primary Dealers ». Two indicators are in favor of this idea: on the one hand, the Fed is refusing to reveal who got (and therefore to what end) the dozens of billions of US Dollars recently given away (3) ; on the other hand, Germany itself, seated on a sound economy, on exemplary budget management methods and big surpluses, is beginning to find it difficult to sell its own Treasury bonds (the Bunds) (4).

Therefore, once we have ruled out the tale according to which US T-Bonds would be so safe and demanded that the whole world would be willing to buy them, even with a negative service, the only remaining explanation is that the Fed has been secretely buying (or having someone else buying) US T-Bonds for months.

In fact such a move is perfectly logical in a context of global insolvency. The US used to need to attract 80 percent of global savings to pay their deficits when the global economy was flourishing and their deficits were a lot smaller. Today that these deficits have increased by 400 percent at least (if not 1,000 percent by the end of 2009) (5) while the planet has lost (and is still losing) thousands of billion-worth of financial assets (6), Washington’s daily problem has become: how to borrow 500 percent of global savings in 2009 (we suppose here that available global savings are stable when in fact asset devaluation is probably higher than savings growth because of the crisis)?

Of course this is mission impossible, condemning the Dollar as mainstay currency (7), unless trying to cheat and disguise the money printing scheme into a global savings investment scheme; and/or, as anticipated already by LEAP/E2020, unless triggering a « world war of State bonds” that will compel the states involved to increase substantially the rates proposed for their bonds and to engage in a merciless process of overbidding to finance their deficits.

The world of 2009 has become insolvent and the war of rates is about to begin (8), causing the ruin of all those who invested in Treasury bonds issued by countries incapable of remaining solvent if the rates rise again, i.e. heavily indebted states (or other economic players).

What central banks following the Fed’s policy are basically trying to do is to make solvent economic players who are not and who cannot be anymore because the economic model they were based on has collapsed. Their hope is that the longer their fictitious solvency lasts (thanks to the input of large amount of liquidities) the greater the chance that the economy recovers, burying the trick. It is smart but you don’t cheat history and the current crisis is of historic dimension. Its duration for many countries (including the US) could be similar to the duration of the 1873-1896 crisis, while its socio-economic impact will resemble that of the 1929 crisis but on the scale of the planet (9). The strategy invented by the US and UK central banks is leading to a disaster because once it becomes obvious to everyone that the crisis is there to last far beyond 2009 (our team anticipated that this new tipping-point would occur around March 2009, see GEAB N°30), the insolvency of the private and public players concerned will be impossible to conceal, and the thousands of billions swallowed in this liquidity supply will turn into explosive debts for the States and central banks which created them.

Practically speaking, governments should stop thinking in terms of « recovery » or « stimulus » plans because there is no solution of continuity between yesterday and tomorrow. Instead they should set up « crisis cross-over » plans concerned about protecting most-exposed populations (unemployed people or people likely to lose their job soon) as well as sound economic actors (no debt and a sustainable economic model for the years to come), and about supporting new socio-economic processes, very different from what the world used to know in the past two decades.

Observing the language used by our leaders can help identifying the moment when the most clever ones will finally understand what sort of a crisis this is. In 2009, unfortunately, LEAP/E2020 has no illusion: prepare for a dangerous cocktail of inefficiency, reality denial, and overbidding, all this in a context of rush to what global saving will be left!

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Notes:

(1) The Bank of England too has engaged in the unlimited printing of Sterling Pounds. To conceal the size of the money creation scheme, the British government is throwing out the obligation (dating back to 1844) for the British central bank to publish a weekly account of its balance sheet. Source: Telegraph, 01/12/2009. In this case too, whistles are blown about a disastrous headlong rush pretending to cure debt by means of even more debt, in other words, pretending to cure insolvency by liquidities. Source: Independent, 01/11/2009.

(2) In fact this process already started many years ago according to LEAP/E2020 who disclosed it in various editions of the GEAB in 2006 already, but at that time it was conducted unobtrusively through the « Primary Dealers ». Today, the crisis is compelling the Fed to do it directly and publicly due to the amounts at stake.

(3) Bloomberg, which cannot be suspected of anti-Wall Street sentiments, has decided to sue the Fed on this subject, requesting details about what collateral the Fed got from the banks helped … with no result so far (source: SeekingAlpha, 12/15/2008). The future Treasury Secretary (Timothy Geithner), who let for instance Citigroup become a giant with feet of clay by loosening its regulation by the New-York Fed which he was heading at the time, is not likely to fight for greater transparency in this field.

(4) Source: Bloomberg, 01/07/2009

(5) Today’s estimated USD 1,200-billion of US federal public deficit in 2009 is very shy: it forgets to include Barak Obama’s recovery plan, it is optimistic about the real cost of the bail-out schemes launched in the past 6 months and it under-estimates fiscal revenue losses. According to our team, the US federal deficit in 2009 should be closer to USD 2,000-billion (vs USD 455-billion in 2008). For instance, no one until now has listed the federated states’ request for more than USD 1,000-billion or the corporate pension « funding gaps » reaching over USD 100-billion in 2009 only. Sources: Reuters, 01/13/2009; NewYorkTimes, 01/13/2009

(6) China’s foreign reserves decreased last year for the first time in 5 years. Source: Bloomberg, 12/22/2008.

(7) As a matter of fact, last Christmas, China unobtrusively authorized investors from its main exporting regions to use the yuan instead of the US dollar to make business with ASEAN countries. This life-size experiment is a harbinger of a trend that will gain momentum in the second half of 2009. Source: TimesofIndia, 12/25/2008. In order to anticipate properly the year 2009, it is useful to analyze China’s vision of this year and of the risks conveyed. This article published in Xinhuanet and entitled « Marked changes in world's political, economic landscape», presents a number of previsions for 2009 and is very instructive. Source: Xinhuanet, 12/28/2008

(8) It will take place in parallel to a commercial war since the United States, with their countless bailout schemes disregarding completely WTO competition rules and with their new Democrat majority, will surrender to the horns sounded by their big car and steel industries and set up a « Buy American » policy. Source: CNBC, 01/02/2009

(9) This 1873-1896 crisis, also called « Great Depression » by the economists, was the first one taking place on a real global scale. The time it lasted proves that crises can spread over very long periods of time, even longer than in the 1930s; indeed this crisis lasted 23 years. The way it unfolded presents many similarities with the present crisis: housing crisis, financial bubbles, banks over-exposed to speculation, insolvency of large numbers of investors, contamination by means of financial and commercial flows due to the first example of globalization, indiscriminate investments in the American Eldorado (today China for instance). The remarkable work conducted by Carmen Reinhart and Kenneth Rogoff, from which the next chart on the correlation between unemployment peaks and banking crises is drawn, can be completed by the study of this 1873-1896 crisis. For a more Canadian/Quebec look on that question, there is also the article in the Devoir (10/09/2008).