The bigger picture on further credit expansion

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The FED balance sheet improvement is strictly temporary, and even that will not bring the base down enough to prevent double digit growth rates on today’s data.

This financial crisis is the credit contraction side of the decades-long credit boom that has already cracked up. It was built on Bretton Woods in the 40s, refueled in the 1970s by going off gold.

This system is entirely wrecked and there is no way that it will be restored. The largest western banks in the world are all goners. The Chinese and Japanese may be in a different position.
The US politicians cannot bring it back, but they will try, because that maintains US dollar hegemony. However, they will fail. That failure will take them YEARS, as much as 7-10 years. At some point, a real Bretton Woods 2 will be put together and the US power will diminish. That will be the way that the world’s states finally address the problem.

What will happen next is an even greater expansion of the FED’s balance sheet as the US tries to restore the old system. The problems of failing European countries can only grow. They will all inflate in an effort to get out of the mess.

Obama needs to get his administration under control and get his China policy together. This he has not done. He needs to be friendly to China. He and Geithner have been rather bellicose. Mrs. Clinton has given off mixed signals, but she is not a Commerce or Treasury secretary anyway. They cannot rebuild a state-based world financial system on a new power-sharing basis without China and other surplus countries. They are not thinking this way; they have a neocon mentality.

But my opinion is that China also has deep problems! It has built its system on credit expansion, currency manipulation, and supplying goods for the US market. There is no silver bullet even if China and the US sat down and figured out how to create a new system. And what kind of system can they possibly create anyway?

Unless Obama shows some real leadership here, it will not get done. Let’s face it. His rhetoric and his policies so far show ZERO signs of this. He can learn. He can change. But that’s a big maybe and it takes time. There would have to be large internal changes in the US on the central bank and US saving. Meanwhile, they will run huge deficits for 5-6 years.

Hence, the FED will be the handmaiden to all of this and its credit expansion will again surge.

7:12 am on February 17, 2009