Recently, I read up on how Iceland is doing—surprisingly well, actually. Unemployment is down, the Krona is going back up. Good balance of trade, good fiscal balance sheet. Quite the turnaround, after its troubles over the last couple of years—
—so then if Iceland is doing OK, why then are we in the hole that we’re in?
Why is the American economy slogging along? Why is Europe circling the drain? Why are the bond markets queasy as a patient with a low-grade malarial fever? Why is Ben Bernanke’s chin quivering and his voice quaking on 60 Minutes? (And by the way: Was that a terrifying spectacle or what?) Why has the conversation turned from bond market risk to sovereign debt risk? Why are commodities rising, equities moving jagged and irrational, and all of a sudden silver is now the new darling of the retail investor?
What the hell is going on? Why are things getting worse, instead of better?
The answer is so simple, it hurts:
When the Global Financial Crisis hit in late 2008, the governments took over the liabilities of the financial sector—and in the two years since that terrible, terrible decision, that single move has turned what was once a problem of financial sector insolvency into a problem of sovereign nation insolvency:
Europe and America are insolvent—they’re broke. They cannot pay the liabilities they have assumed.
That’s why we’re in the trouble we’re in. That’s why Ben Bernanke is crying himself to sleep every night. That’s why the world’s economies are slowly circling the drain—
—remember what happened, in the fall of 2008?
The Federal government bailed out the banks with the famed—not to say infamous—TARP: The Troubled Asset Relief Program, a $700 billion bailout of the banks by any other name.
For its part, in order to “save the financial sector”, the Federal Reserve expanded its balance sheet—that is, it printed money—to the tune of $3 trillion dollars, between Quantitative Easing in ‘08-‘09, QE-lite in early ‘10, and now QE2.
via Gonzalo Lira: Want To Ruin Your Own Country? Assume Your Banks’ Liabilities