It barely received any coverage in the news, and the financial wizards in front of the TV cameras aren't even paying attention to it. The FDIC recently proposed that its 8,000 member banks pay their next three years' worth of deposit premiums now to help fund the FDIC's ability to keep shutting down banks in trouble. This past year, while the number of foreclosures has been higher than experts desire, it's important to note that this is the lull in the storm. We already knew two years ago that this would be a lull, when Credit Suisse issued their report on the state of the banking industry, which 60 minutes finally noticed a year later, one month after the “official” start of the crisis. Now, however, the number of foreclosures has started increasing, and it will continue to increase until the end of 2011, at which point the number of foreclosures, and troubled banks, will reach another peak like they did in 2008.



Source: 60 Minutes Source: 60 Minutes

This raises a question: if the FDIC raises the money now and spends it to shut down banks currently in trouble, what cash will they use in 2011, when those funds are all used up, and banks are falling like dominoes?

Two possibilities exist. First, they could simply try to raise more advance premiums from the banks. However, by that time, the balance sheets are going to look a lot worse. Another large hit in the form of deposit premiums will not be a realistic option. Second, they could once again turn their eyes to the Federal Reserve to create more cash out of thin air. That won't be realistic either.

The problem is that the Fed have already played that card, and the world trembled. The card already lies on the table to the tune of trillions of dollars. The result is that the dollar's value compared to other fiat currencies has fallen precipitously. The US Dollar index, a measure of the dollar's strength against the euro, the Japanese yen, the pound sterling, the Canadian dollar, the Swedish krona, and the Swiss franc, which a year ago measured in the range of 85 to 90, today is in the mid-70s. This means that the dollar lost roughly 10-15% of its value compared to the other, very weak fiat currencies of the world over the past year, as a direct result of the Fed's actions. The record is even worse when examined over the past eight years, because the dollar has lost almost 40% of its value compared to foreign fiat money during that time. If the Fed tries to play another card just like last year's bailout card, it would likely leave the dollar in tatters, setting the stage for the removal of the dollar as a world reserve currency.

It's difficult to make clear to Americans how damaging this will be to the American economy. Once the Chinese the Japanese, the Europeans, the Middle Eastern sheiks, and the other holders of dollars around the world regard the dollar as no longer worthy of its exalted status, they'll start dumping it. In fact, there are rumors that they already have started. All it takes is for all those dollars to start getting spent in the economy, and hyperinflation will fall upon us.

Instead, the Fed, the U.S. Treasury, and the other princes of financial darkness assure us that the economy is recovering and that all will be well eventually. Even the media seem to buy this line, only fretting about the continuing high levels of unemployment in the 10% range. They conclude that the economy will recover, but the recovery will be slow because so many people are out of work. This disconnect between rhetoric and reality is disconcerting at best and intentionally deceitful at worst. The FDIC's proposal to collect three years' deposit premiums in advance is tantamount to confessing they can't continue to bailout the banks, even after all the newly minted money that's been lavished on them. In essence, the banks and the regulators are caught between a rock and a hard place, knowing full well that things are going to grow progressively worse over the next two years. When the crisis peaks again, this time in 2011, they will not be able to again bail out the already weakened banking system.

The voters have already made clear that they opposed the recent bailout. There are no more bailout cards to play. What will the powers-that-be do when the spam hits the fan? I shudder to think about it.

Walt Thiessen is the author of the new novel, The Money Suckers, available as a free e-book download.