U.S. & Bernanke Hung Out To Dry By Sarkozy & Merkel

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johnkarls
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Joined: Fri Jun 29, 2007 8:43 pm

U.S. & Bernanke Hung Out To Dry By Sarkozy & Merkel

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Yesterday (Mon Dec 5th), French President Sarkozy and German Chancellor Angela Merkel effectively hung U.S. Federal Reserve Chairman Bernanke "out to dry"!!!

What they actually announced was that they were serious about their ultimatum of last August when they announced an earlier ultimatum that Europe's "problem children" countries would just have to get their own governmental budgets under control. The Mon Dec 5th ultimatum made the following points:

(1) Each European government should face substantial automatic fines if its governmental deficit for any year exceeds 3% of its Gross Domestic Product (GDP) -- it should be noted that the 3%/GDP limit had been one of a list of requirements for admission to the European Union (EU) but, once admitted, no country had ever faced criticism, much less sanctions, for exceeding the limit.

(2) THERE WILL BE NO FRENCH OR GERMAN GUARANTEES FOR ANY SOVEREIGN DEBT OF ANY EUROPEAN "PROBLEM CHILD" COUNTRY. Presumably, France and Germany would also continue to bar the European Central Bank (ECB) from doing so either. [The ECB "prints" Euros and is barred by treaty from taking any action that would benefit a single member country.]

(3) France and Germany are prepared to implement these principles with only the 17 Euro-Zone countries if the 10 other EU members do not go along (The U.K., for example, is one of the 10 E.U. countries that did NOT abolish their own national currencies in favor of the Euro).

(4) France and Germany expect at least the other 15 Euro-Zone countries to agree to these principles at its Thurs Dec 8th meeting of Euro-Zone Finance Ministers -- though there has been no reporting on what France and Germany will do if the others do not agree (presumably France and Germany would re-establish the French Franc and German Deutsch Mark).

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It should be noted that France and Germany did NOT have to deal with the insolvencies of commercial banks that were stupid enough to make loans to Europe's "problem children" countries -- because U.S. Federal Reserve Chairman Bernanke has already announced that the Fed will "print" enough dollars to keep all commercial banks solvent through 2/1/2013!!! This is Bernanke's "QE-4" -- "QE" stands for "quantative easing" which is a euphemism for "printing" dollars.

Bernanke's QE-4 was the subject of the special "Current Events" Q&A in the Second Short Quiz posted in this "Participant Comments" section of this bulletin board. [A special "Current Events" Q&A was required because QE-4 was announced after preparation of the Second Short Quiz but before preparation of the answers.]

It should also be noted that France and Germany did NOT address the impending bankruptcies of Italy and Spain -- because U.S. Federal Reserve Chairman Bernanke had already announced that the Fed will "print" enough dollars to guarantee all bonds that Italy and Spain need to issue before 12/31/2011 (whether to finance current deficits or to re-finance maturing bonds already in existence)!!! This was Bernanke's "STEALTH QE-3" which was the subject of Q&A-21 through Q&A-29 of the First Short Quiz posted in this "Participant Comments" section of this bulletin board.

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The obvious question is how badly Bernanke's STEALTH QE-3 and his overt QE-4 will damage the U.S. economy.

Re STEALTH QE-3, the First Short Quiz noted that Bernanke and the Fed had refused to even provide any details regarding QE-3 on the grounds that it comported with previous commitments, though the obvious implication was that those "previous commitments" were probably contained in a panic telephone call BY BERNANKE to the ECB the day before Bernanke refused comment.

As noted in the First Short Quiz, http://www.cia.gov estimated the Italian and Spanish governmental debt to total approximately $3 TRillion in 2010. So "worst case" the U.S. is probably on the hook for approximately $4 TRillion for STEALTH QE-3.

["Worst case" assumptions are that all of the $3 TRillion in existence in 2010 needed to be re-financed before 12/31/2011 and there may be as much as $1 TRillion in additional Italian and Spanish governmental deficits since whenever in 2010 the CIA estimated the amount of accumulated Italian and Spanish governmental debt.]

As noted in the "Current Events" Q&A of the Second Short Quiz, how many dollars Bernanke will have to "print" to keep all insolvent commercial banks above water through the end of January is difficult to estimate -- BUT THAT QE-1 WITH WHICH BERNANKE KEPT U.S. BANKS SOLVENT DURING 2007-2009 TOTALED $7.77 TRILLION (APPROXIMATELY 10 TIMES THE SIZE OF THE TARP PROGRAM WHICH WAS PASSED BY CONGRESS FOR THE SAME PURPOSE!!!) SO WE SHOULD BRACE OURSELVES FOR SOMETHING ON THAT MAGNITUDE!!!

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The next question is how much of the estimated $4 TRillion in Fed loans to Italy and Spain will ever be repaid!!!

And how much of the estimated $8 TRillion in Fed loans to insolvent European banks will ever be repaid!!!

If Greece can be cited as an example, creditors were forced by the French and German governments to agree to a 50% loss as the "price" they would have to pay for the French and German governments agreeing to guarantee the other 50%!!!

And who knows how much the creditors would have lost without the 50% guarantees by the French and Germans!!!

So a good guess is that the Fed would lose at least 50% of the $12 TRillion that it is "printing" and loaning!!!

AND PERHAPS EVEN LOSING 100% OF THE $12 TRILLION, SINCE THE GREEK, ITALIAN AND SPANISH VOTERS WILL PROBABLY BE ENCOURAGED BY THE ILL-ADVISED ACTIONS OF BERNANKE (WHAT IS "SANTA CLAUS" IN THEIR LANGUAGES!!!) TO CONTINUE "TO PARTY" RATHER THAN DEAL WITH REALITY!!!

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I've been discussing with my children, both of whom also majored in Economics for undergrad (Hilary at MIT and Mike, like his dad, at U/Mich), what the economic effect of "printing" $12 TRillion AND RECEIVING NO VALUE IN EXCHANGE would be for the American economy.

We agree that the money supply can be increased to compensate for permanent reductions in demand without causing inflation. And that the money supply can be TEMPORARILY increased to compensate for DEFERRALS IN SPENDING by consumers, etc. (what economists would call a reduction in the "velocity" of money) without causing inflation.

However, if the analogy in Q&A-25 of the First Short Quiz that compared the American economy to a corpse that would normally contain about 10 pints of blood is used and we theorize over the effect of "transfusing" into the corpse an additional 10 pints of blood because the corpse has no "pulse" -- what will be the effect if the corpse returns to life and begins to walk around with 20 pints of blood!!!

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FIRST, AS NOTED IN Q&A-25, THERE WOULD BE RUNAWAY INFLATION!!!

Inflation causes severe hardships for citizens who have relied on the Federal Reserve to maintain a minimal rate of inflation.

For example, citizens who have been stupid enough to have invested their retirement funds in dollar-denominated assets such as U.S. government bonds, bank accounts, annuities, etc., can only watch in horror as their hard-earned retirement "nest egg" is destroyed!!!

Even citizens who are stupid enough to work for a salary can only watch in horror as the value of their pay checks is reduced and they are beholden to employers whether to give them a "raise" which might, or might not, be given and which might, or might not, cover the increase in the "cost of living" (aka "inflation").

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SECOND, LARGE HOLDERS OF U.S. GOVERNMENT DEBT MAY FLEE ELSEWHERE, PUTTING THE UNITED STATES IN THE SAME CATEGORY AS ITALY & SPAIN -- WHICH ARE STILL SAVED FROM "JUNK BOND" INTEREST RATES OF, SAY, 20% SOLELY BECAUSE OF BERNANKE'S "STEALTH" QE-3 [20% INTEREST RATES FOR THE U.S. WOULD MEAN THAT THERE IS NOTHING LEFT IN THE FEDERAL GOVERNMENT BUDGET FOR ANYTHING ELSE!!!]

As we have studied many times in the past, a country's currency, unless backed by something such as gold or 16 ounces of silver (the old British Pound Sterling), is nothing more than a zero-coupon infinite-term debt obligation.

Accordingly, China, Japan and oil-exporting countries (each of which holds approximately $1 TRillion of US governmental debt, and all of which are well aware that the debt is payable at maturity in dollars) might get "jumpy" if they focus on what Bernanke has done and decide to dump their U.S. government bonds while they and the dollar are still worth something!!!

In other words, Bernanke "is playing with fire" and adult supervision is needed!!!

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AND IF YOU THINK THAT THE RUNAWAY INFLATION THAT WOULD RESULT IS THE ONLY PROBLEM, PLEASE CONSIDER WHAT ECONOMISTS WOULD CONSIDER THE "OPPORTUNITY COST"!!!

"Opportunity cost" is what could have been accomplished instead.

Instead of "printing" and wasting $12 TRillion on European "problem children" governments and European commercial banks that are insolvent because they were stupid enough to loan money to Europe's "problem children" governments, THE U.S. COULD HAVE "PRINTED" 12 TRILLION AND SPENT IT ON RE-BUILDING OUR INNER-CITIES AND ON PROVIDING A DECENT EDUCATION FOR INNER-CITY CHILDREN!!!

That is why I have branded Bernanke as MORALLY BANKRUPT in the Short Quizzes!!!

Indeed, the NY Times with whose editorials and OpEd articles I often agree, has been pursuing an editorial policy for many months of advising German Chancellor Angela Merkel that she will just have to convince German voters to pay for the profligate spending of Europe's "problem children" governments, and to convince German voters to pay for the insolvencies of Europe's commercial banks that were stupid enough to lend money to Europe's "problem children" governments.

And leading up to the Mon Dec 5th ultimatum by Sarkozy and Merkel, the NY Times featured a lead editorial that commended Bernanke for QE-4 and berated Merkel!!!

Accordingly, I would brand the NY Times as being as MORALLY BANKRUPT as Bernanke!!!

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