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March 24th, 2010

Via: Asia Times:

By 2014, International Monetary Fund official John Lipsky remarked March 21, the debt-to-gross domestic product (GDP) ratio of the Group of Seven countries will reach 100%, and the governments of the industrial world will carry the highest debt burden since shortly after the end of World War II.

That is bad news; worse news is that governments are shoveling money into the world banking system to finance the debt expansion. Following the great bank bailout of 2008, the global banking system is socialized de facto, shifting its resources towards government debt and away from private sector financing.

Governments averted a financial apocalypse in 2009 by bailing out the bankrupt banking system. But who will bail out the governments? The answer for the time being is that they will bail themselves out at the expense of the private economy. In the post-apocalyptic financial world, private banks have turned into flesh-eating zombies that cannibalize the private economy in order to finance government borrowing requirements not seen since World War II.

…

Note that the central banks of the world have not increased their holdings of US government securities to a significant extent. Their net purchases are running at a modest $20 billion a month, or an annual rate of $240 billion.

The US Treasury has become dependent on global private banks. According to Treasury data, $108 billion of the $180 billion in net foreign purchases of US Treasury securities during the three months through January came from London and the Cayman Islands.

…

Where are the banks getting the money to lend to the US government? From the US government itself. The Federal Reserve has increased bank reserves by $1.4 trillion since the beginning of the crisis, feeding funds into the banking system which the banks immediately lend back to the government, along with $300 billion of additional funds freed up by the reduction in loans to the private sector.

Research Credit: GP

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