In summary, nearly all the money Bernanke has created -- plus all the money he has supposedly poured into the economy -- is going nowhere except to reduce indebtedness and pile up in corporate coffers. In other words, from the point of view of benefiting the economy, it has been squandered and wasted. So Bernanke and the Fed are essentially running on a treadmill, accomplishing nothing that will help bring back the economy.
The potential impact of this situation cannot be underestimated. Here's why.
Including both the government and private sectors, the total new credit created in 2007 was $4.5 trillion. But now it's running at an annual pace of about ZERO! That $4.5 trillion was an immense amount of money -- and it's money that's no longer pouring into the economy.
Understand that this kind of reversal is unprecedented. This has never happened before in modern times -- not even during the deepest recession of the postwar era. During the Great Depression? Yes. But in proportion to GDP, the debt buildup before the Great Depression -- as well as the debt liquidations during that Depression -- were not as large as they are today!
And it's getting worse! Despite everything Bernanke has done to try to stop it, the debt liquidations are accelerating -- especially in the mortgage area. Consider these basic facts:
Back in 2005, lenders issued $1.4 trillion in new mortgages over and above those that were paid off or went bad -- a fantastic amount of fresh new money pouring into the housing and construction markets.
However, by 2008, lenders had cut back their new mortgage lending by a whopping 94%. As a result, the housing industry virtually died -- an unmitigated disaster for the economy.
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