The two Achilles’ heels of our economy are insolvent government and the insolvent banking system. Both are frauds, likely to explode at any time.
Doug French goes into great detail regarding the banking system. The key question is the following:
But the question is, Why haven’t there been more bank failures? In 2008, there were 25 failures, last year there were 140, and so far this year 129 have been seized on Friday nights. The greatest real-estate bubble in history has popped — first residential and now commercial — and we only have 294 failures?
The economy is in shambles, however compared to the banking system, it appears healthy. The toxic waste on bank books is enormous and is being covered up by allowing the banks to carry it at original cost value rather than market value. The government, in essence, has told banks that it is OK to lie on their financial statements and they are doing so. An attempt to cover up these massive is underway.
Power elites see the collapse of the entire system if the banks fail. They are doing everything — legal or not — to avoid the outcome. Doing so, of course, makes matters worse when the problem finally metastasizes into the open. This conduct is criminal on the part of regulators, policy makers and desperate bank executives (although they may have been granted a waiver via the accounting treatment). Banks must go along in order to avoid closure. It is a game that cannot be won, but likely will be played until it is impossible to hide the problem.
When the banks are seen to be insolvent, the economy collapses. That likely collapses the government as well.
This hopeless scam is being waged by a power elite to anxious to survive. Anything goes to protect the corrupt government. Mathematically, I don’t believe there is any way that this cover up can succeed.
Read Doug French’s interesting discussion here.
Following along similar lines is Barry Ritholtz’s piece about Felix Zulauf, one of the bright lights of finance:
Swiss money manager Felix Zulauf shared his market views at a Barron’s conference, and according to Robin Blumenthal, much of it was grim:
Felix Zulauf
“Most of the banks are not sound,” Zulauf told the audience of 250. “The crisis has only begun; there will be a long-term process of one mini-crisis after another.”
Zulauf, a Barron’s Roundtable member who raised the possibility of further Fed easing last January, when most pundits were anticipating tightening, said the next few years “could be the setup for much higher inflation later.” In response to a question about how the current mess differs from the 1930s, he quipped that “central banks can keep the economy afloat forever. At QE33, the Fed will own the whole system,” a reference to the possibility that Fed stimulus could go on indefinitely. The resulting inflation would lead to “the destruction of the currency,” he said.
The prescient macro-focused money manager likened investing in the industrialized world to “moving deck chairs around on the Titanic.” Among the possible icebergs: a Greek default, a 30% drop in Spanish real-estate values and a German popular revolt against the government’s support of fiscally irresponsible European Union members. Zulauf said investors should be focused on where to store their money, because “you might not be able to get it out when you want it.”
He suggests a portfolio that is 20% in gold (he accurately predicted in 2009 that gold would hit $1,300 this year); 30% to 40% in mostly emerging-market equities; and the rest in three-year government bonds, denominated in such currencies as the Singapore dollar and the Swiss franc.
Video interview with Zulauf is here.
It has been my contention for quite a while that QE is not about healing the economy. It is about keeping the government afloat. Without QE the government will be unable to pay its bills. The mere fear of that happening would be enough to collapse the dollar so we go through this sham of pretending that what Bernanke is doing is economic policy rather than necessity.
