Doomed If We Do, Doomed If We Don’t

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Even if we used a 10:1 fractional reserve ratio, the Fed’s $85 billion per month QE was creating $10 trillion per year in liquidity.

The point to understanding the Status Quo financial system is doomed is not to revel in the doom but to understand why we have to look past the current corrupt, predatory, parasitic system to a better arrangement. That's positive.

Longtime correspondent Harun I. submitted this quote from John Ing and a commentary on simple arithmetic. In “We Are Nowhere Near The Chaos That I Expect", John Ing observes the consequences of deleveraging a highly leveraged system:

"We have already had $3 trillion in stock market capitalization wiped out. It is amazing that just a $20 billion tapering has been enough to cause all of this chaos around the globe.”

Harun then explained why it isn't amazing at all–it's entirely predictable:

Simple arithmetic will do. The Fed is leveraged 72:1. For every dollar it removes, it actually removes 72. The product of 72 and 20 is 1,440. The Fed has actually removed nearly $1.5 trillion of liquidity with its $20 billion tapering.

It is a mathematical certainty that this geometric progression of debt growth will end (remember, for everything that is growing geometrically, that upon which the growth is dependent is contracting at the same rate). The contraction (deleveraging) must necessarily be as geometric as the expansion (leveraging).

The Fed can try to keep interest rates at zero but there will be dire consequences. The Fed can try to “taper” but there will be dire consequences.

What I find amazing is that even if we used a 10:1 fractional reserve ratio, the Fed’s $85 billion per month QE was creating $10 trillion per year in liquidity.

The World Economic Forum reported in 2011 that $100 trillion in new credit would be needed for world growth going forward. How long does anyone think tapering will last?

Over US$ 100 Trillion Additional Credit Needed to Support Global Growth (World Economic Forum)

Trying to force simplistic results out of complex systems inevitably generates unintended consequences. Liquidity and credit expansion act like pressure in a closed system; central planners look at the site of the last financial break and see no leaks, so they assume they've got the system under control.

But the next failure in the system will occur where no one is looking–the points in the system that everyone assumes are "safe."

The system is doomed if central banks continue creating trillions of dollars in new leveraged credit and liquidity to keep the system from imploding, and it is also doomed if they cease creating new leveraged credit (i.e. taper their geometric expansion of credit). Doomed if you do taper, doomed if you don't taper.

Here's the Fed balance sheet. If you get a magnifying glass, you might discern some tapering.

Geometric expansion of credit is visible throughout the system. Never mind the infamous shadow banking system–look at the insane expansion of credit/debt in student loans: