Bankers love debt: The more debt, the more interest they collect.

Issuing credit cards and collecting 21 percent interest and billions in late fees seemed like a “can’t miss” proposition. It was, until people couldn’t pay the debt back. Now the unwinding of the greatest debt bubble in history has created a Second Great Depression. Instead of learning from the past, the Federal Reserve has chosen to do exactly what led to the crisis. They have lowered rates to 0 percent and have printed money at prodigious rates. The Fed has doubled their balance sheet in the last 12 months.

They have loaned billions to the bankrupt banks that inhabit our financial system while accepting worthless pieces of paper as collateral. They will not reveal to the public the banks they have loaned money to or the collateral that backs up those loans. The arrogance of Ben Bernanke proves that the Federal Reserve answers to bankers, and not to the American public. The books and records of the Federal Reserve are not open to scrutiny by the General Accounting Office. Ron Paul has introduced the Federal Reserve Transparency Act which would open their books to the public. No organization with as much power as the Federal Reserve should be permitted to operate in the shadows.

The future is cloudy but the direction is clear. Government will spend trillions of dollars. Congress will increase taxes on the rich and secretly raise taxes on the masses by calling them cap and trade fees. The Federal Reserve will pull out all stops to create inflation. When you owe the rest of the world $11 trillion, inflation makes the debt less burdensome. The dollar will decline versus gold. With the enormous amount of currency creation and spending by the government, the economy will eventually pull out of this depression. The acceleration will take the Federal Reserve by surprise. They will be hesitant to raise interest rates. The inflation genie will get out of the bottle and will not go back. The hyperinflation that takes hold will lead to social unrest, rioting, and a drastic reduction in the American standard of living.

I’m not sure which is more damaging to banks/governments. However, I’m sure they know which is more valuable to the “upper crust” of people here in the US. The wealthy need inflation to grow their hard (non middle class) assets. It includes (bigger) businesses -especially businesses with overseas reach, art collections, larger real estate holdings, etc etc. Deflation simply destroys these.

The Fed has gone nuts with Added debt. We already had ridiculous levels of debt. The notoional value of CDS seems a little small - but a default of just 5%-10% would be scary. China is concerned about this problem (hence the visit from Hillary). By adding trillions of dollars of debt, we buy some time. The structural problems with our economy mean more debt financed growth is a requirement in the future. I can’t imagine that really going crazy would be acceptable to the world down the road.

I still think the biggest problem is the crisis of confidence. The Fed can talk all it wants to about dropping money into the economy but if banks are going to hoard cash, simply plug holes, while the consumer saves and pays debt, then the economy will sputter at best. People will take the money but more and more will be needed. It’s a nasty game to be involved in.

There is no solution that will not be painful to everyone in the United States. The only solution that would put America back on a path of sustainable prosperity would be a gold/precious metals backed currency that would force government and its citizens to live within its means. Congress would need to vote for something that would take away its power. With our current political system, this is impossible. Money is power. This leads to only one conclusion. The existing Ponzi scheme will have to collapse before we can adopt a rational financial system for America. It may take decades, or it may happen in 2010. No one knows.

Related Posts:

• Here is a little truth from Congressman Ron Paul’s book “End The Fed” .
• Regardless of what the Chinese do or say, short term the dollar will go up.
• A must read: “Why Interest Rates Will Almost Certainly Rise in 2010″
• Worth a read: Why the Stock Market Should Crash?
• 2010 Will Look Four Times Worse Than 2009, AT LEAST!!

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