Creating more debt won't solve the economic crisis

World banks are trying to solve the financial crisis the same way they caused it — by creating more debt.

Lmar Niazman/Reuters/File
The Euro sculpture is pictured in front of the headquarters of the European Central Bank in Frankfurt. Bonner argues that the world's largest banks are trying to get out of debt by creating even more debt.

Readers who expect an early end to this Great Correction are going to be disappointed. There is no sign of it reaching its conclusion anytime soon. Just the contrary…there’s no end in sight.

The Great Correction seems to be going along just as you’d expect. Or, just as we’d expect.

Here’s the latest from Reuters:

Home prices fell more steeply than expected in November, and consumers turned less optimistic in January, highlighting the hurdles still facing the bumpy economic recovery.

The S&P/Case-Shiller composite index of single-family home prices in 20 metropolitan areas, released on Tuesday, declined 0.7 percent on a seasonally adjusted basis, a bigger drop than the 0.5 percent economists expected.

Separately, an index of consumer attitudes fell to 61.1 in January from 64.8 the month before, as Americans turned gloomy about the job market and income prospects, said the Conference Board, representing private companies.

Some improving housing data in late 2011 had raised hopes the recovery was finding its footing. But weaker numbers this month have underscored how lengthy the healing process will be.

US housing prices have plunged by about a third from their peak before the financial crisis, and a combination of high unemployment, tight mortgage lending conditions and more foreclosures in the pipeline are holding back a recovery.

A report released on Monday showed spending was flat in December as Americans focused more on saving.

Once a key pillar of the US economy, Americans have taken a more frugal tack as many struggle with hefty debt burdens.

And guess what? The Great Correction is having the same effect in Europe. Here’s The Wall Street Journal:

LONDON — UK households made a record repayment of personal loans and credit card bills in December, Bank of England data showed Tuesday, underscoring households’ limited appetite for spending and heightening fears the UK may slip back into recession.

BOE figures showed UK consumers made a net repayment on unsecured loans of £377 million ($592.3 million) in December, the highest figure since records began in 1993. It was also the first time since last January that repayments exceeded new borrowings…

In some ways the situation in Europe is worse than in the US, depending on where you are. Youth unemployment is up as high as 50% in some areas. Even in supposedly strong economies it is around 20%.

And, oh yes, you want yield? How about a 10-year note from Portugal? It comes with a yield of 17%.

Portugal’s economy is shrinking at a 5% annual rate. Italy, Spain, Greece and Ireland are not in much better shape.

So what do the euro-crats do? Same thing as the US-crats. They give the banks money, hoping the nice bankers will spread it around.

Last month, the European Central Bank provided 489 billion euros in 3-year loans. “Super Mario” Draghi — formerly head of the bank of Italy, now head of the ECB — keeps the banks from going bust…and begs them to keep the governments from going bust.

The banks needed about 230 billion to refinance loans coming due in the first quarter of this year. They got the money from the ECB.

What a show! Draghi, Monti, Papademos and all the other ‘technocrats’ now managing the crisis are the very same guys who created the crisis. They worked for Goldman, ran central banks, and helped organizations such as the IMF and the World Bank make a mess of the world’s financial system.

Now, they’re solving the crisis the same way they caused it — by creating more debt. The banks can’t pay their bills so the central bank lends them money. Governments can’t pay their bills either, so the central bank lends them money so they can lend it to the government.

The ECB says it will give away more money on February 28th. Goldman Sachs is advising other banks to take the loot. As much as $1 trillion could be given out.

Let’s see, how does this work? You are deeply in debt. So, the bankers lend you money so you can continue making payments. You go even deeper in debt…and the bankers lend you more money so you can keep making payments…

…and so on…

Where does this end? We don’t know.


Bill Bonner
 for The Daily Reckoning

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