THE END: Three Must-See Charts

Icecap Asset Management, via (who else?) Tyler Durden:

...Since WWII, the Americans, Japanese, British and Europeans have spent way more money than they owned. But that was okay because the money they borrowed wouldn’t have to be repaid until some far away day in the future.

Unfortunately the future has now arrived and today, the next generations of Americans, Japanese, British and Europeans have all plunged into a deathly debt spiral... Today it is no coincidence that the Americans, Japanese, British and Europeans have all set interest rates as close to 0% as possible. Also today, it is no coincidence that the Americans, Japanese, British and Europeans are all printing money...

...The crash of 2008 wasn’t simply due to an overheated American housing market – this was just the one of many final straws. In fact, those dark days of just a few short years ago were the culmination of years of too much spending and too much borrowing, and then trying to sweep these stresses under a money printing rug to be forgotten...

...The excesses of today were not accumulated over a standard 3-5 year business cycle, but rather the excesses accumulated over 60 years of fortuitous, kicking-the-can-down-the-road policies by governments and central bankers...

...Now, the “save the day” strategy of cutting interest rates can work for a really long time – well, at least until there are no more interest rates left to cut. Unfortunately – with close to 0% rates everywhere, the World has reached that day.

In addition to cutting interest rates, Keynesian economics also believes that to really save the day, governments should combine cutting interest rates with deficit spending... The belief is that when the economy slumps, lower interest rates will encourage private investors to borrow, hire and spend again, but in the meantime governments should fill this spending lull by building new bridges, roads and sidewalks...

...Keynesians want you to believe that although cutting interest rates, running deficits and excessively borrowing didn’t exactly work out as planned – this last great hope of money printing should work.

We of course have our doubts. Like Friedrich Hayek, we believe the only way for the global economy to recover is for governments to dramatically reduce their interference in private markets. As long as central banks and governments continue to influence interest rates, lending, and employment - private capital will not return.

Instead of living in a World where economic success is rewarded, we now see a wave of new Western World governments who support taxing success to reward those who failed...

...the one point we hear no one pondering aloud is exactly what happens the moment the Americans decide (or are forced) to stop printing money.

...For those who don’t quite understand the effects of money printing, you just have to know that during the last year the Americas had a $1 trillion deficit – meaning the government spent $1 trillion more than what they collected in taxes. In a normal World, people and countries have to borrow the $1 trillion to pay the bills, but not the Americans.

Only in America does money grow on trees. And, in this case of the $1 trillion that was needed to fund the deficit, Ben Bernanke and the US Federal Reserve will print about $480 billion...

...The real concern and balancing act facing Mr. Bernanke and his Keynesian team is what happens to private capital the moment it is announced that money printing will stop, or if over night interest rates were to rise.

At that moment, make believe becomes real believe as private capital once again gets to play in the real World. And in the real World, private capital will demand to be paid given the amount of real risk that is present.

Two things will happen. For starters some of the private capital will simply leave to find a new home in other countries or markets. In addition, the price of money (ie. interest rates) will increase but not just for US government treasuries and bonds – but across the entire credit spectrum...

...To understand the importance of this concept, you just need to know that currently the average interest rate paid by the Americans on their debt is 2.56%. This equals $417 billion/year. If long-term rates were to double to 5%, the cost of funding this mess rises to $834 billion or 6% of GDP...

...the ill-fated exercise of following Keynesian economics to kick the can down the road will continue once again. The World has already seen the failure of the Keynesian approach of continuous interest rate cutting, deficit spending and tax cuts.

The bad news is that the money printing option embraced today will not create a different outcome.