Sunday, June 27, 2010

RBS Warns Clients: Get Prepared for the Fed's Printing Press

Another video tonight after a few comments.

The video is from a fan of The Automatic Earth which is one of my favorite reads on the Internet. 

There is some great advice in the piece and I hope all of you listen to it in its entirety.

The reset button is about to be pushed and we all need to be prepared.  My gut has been telling me that things are about to unravel. I am starting to see some extremely accomplished people out there that are starting to warn of the same thing.

As we saw in Greece, things can unravel in a matter of days. 

Ambrose Evans Pritchard wrote a piece tonight about a RBS warning that went out to their clients:

"RBS tells clients to prepare for "monster" money printing by the Federal Reserve

As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

Published: 5:11PM BST 27 Jun 2010

By Ambrose Evans-Pritchard

Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.

The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.

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Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely(

because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".
We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.

Despite the apparent rift with Europe, the US is arguably tightening fiscal policy just as hard.

Congress has cut off benefits for those unemployed beyond six months, leaving 1.3m without support. California has to slash $19bn in spending this year, as much as Greece, Portugal, Ireland, Hungary, and Romania combined. The states together must cut $112bn to comply with state laws."

The Congressional Budget Office said federal stimulus from the Obama package peaked in the first quarter. The effect will turn sharply negative by next year as tax rises automatically kick in, a net swing of 4pc of GDP. This is happening as the US housing market tips into a double-dip. New homes sales crashed 33pc to a record low of 300,000 in May after subsidies expired.

It is sobering that zero rates, QE a l'outrance, and an $800bn fiscal blitz should should have delivered so little. Just as it is sobering that Club Med bond purchases by the European Central Bank and the creation of the EU's €750bn rescue "shield" have failed to stabilize Europe's debt markets. Greek default contracts reached an all-time high of 1,125 on Friday even though the €110bn EU-IMF rescue is up and running. Are investors questioning EU solvency itself, or making a judgment on German willingness to back pledges with real money?"

My Take:

I guess it's time to get prepared for another blast of QE if Ben gets his way.  I usually enjoy Pritchard but the conclusion of this piece is essentially hogwash.  Most of the quotes are from RBS who obviously wants to see this happen.

The idea that Bernanke thinks that he can pull off another huge round of QE without rates soaring is completely delusional.  Folks:  The Fed does not control interest rates.  The bond market does.  They will tell you otherwise but history has shown us that this is a crock.

Just look at the PIIGS bond markets if you need some proof.  When the end is near the bond market always calls you out by running away from your debt because they know that they will likely never be paid back.  The risk of default is simply too high to hold the paper.

Greek rates are soaring once again even after the ECB back stopped them.  If the bond market have called out the ECB then why wouldn't they call out the Fed?  The answer is they will.  The Fed arrogantly believes that they won't.   I strongly disagree.

The unintended consequences of the Fed attempting another $2-3 trillion QE spending binge are unfathomable.   First of all the bond market would never accept it.  They would all start dumping treasuries. 

Rates would eventually move higher.  Perhaps not right away.  Rates collapsed the last time they pulled this but our deficit issues were not nearly as severe.  Like any child who is misbehaving, there comes a point where you just put a stop to it.  The way I see it:  The Fed is about to be sent up to their room without dinner by the bond boys.

There are other consequences to worry about: What would happen to inflation in such a scenario?  What happens to the dollar?  Does it collapse?  What happens the price of gas and other commodities if the currency collapses?

This is absolutely crazy!  How could the Fed be contemplating such a move after seeing no economic improvement after already spending 1.75 trillion in QE? 

Let's face it:  Pretty much all of the economic growth that we have seen in the last few quarters has been as a result of government stimulus.  Hardly any of it of it was real private sector growth.  In fact, the private sector is contracting at an alarming rate. 

Folks, we are in a depression right now without government spending.  The reality here is that we can only do this magic act of "hiding the losses" for so long without bankrupting ourselves. 

The reality here is the velocity of money(M3) is collapsing and debt deflation has arrived.  There is no turning back at this point.

The velocity of money is collapsing because we(both the country and the people) are all up to our necks in debt.  As a result, we do not have the ability to borrow anymore.  Once you reach this saturation point its over.  The debt needs to be defaulted on ar get paid off before you can see any real economic growth.

We all maxed out the credit cards on $500,000 houses, $50,000 college educations, and $40,000 SUV's.s The Fed's credit card still works for now but it's days are definitely numbered.

The idea that the Fed would even be considering such a move tells you how much trouble we are in. As you can read above, the doo doo is already beginning to hit the fan.

States face a combined $100+ billion dollar budget deficit.  Unlike the USA, the states must balance their budgets by law.  AS the stimulus money disappears(as explained above) there is only one way to close the budget gaps:  Cutting state workers and benefits. 

The senate voted down another extension of unemployment benefits last week.  I expect Washington moving forward will tell the states that they are on their own.  This will result in a lot of pain.  Some tough cuts will have to be made and they will effect all of us.

If Ben pulls the trigger on this money printing game you can be sure that the end game is near. 

Watch below and get prepared because the fat lady is about to sing.


Anonymous said...

Interesting - you argue against the Pritchard, then provide an even worse scenario. I've been aggregating many news articles (wealthy are giving less to charity and buying gold, and redefaults running at 75%, for example) and have come to the same conclusion - things are unraveling right now.

Jeff said...



He thinks more QE spending is going to dig us out of this.

I totally disagree with that.

Things sure did unravel today. Very scary!