This all raises the simple but unanswerable question:

Now what?

Since the Fed has no Plan B, what does it do next?

Does it print more money, buy more bonds and pray that despite no change in policy, it will magically see a change in results?

Does it try to repeal the law of gravity — to somehow prevent sellers from selling and falling prices from falling?

Does it seek to travel back in time — to somehow reverse the blunders of past Fed Chairmen who helped create today’s debt monster in the first place?

Sorry, but those “solutions” are both insane and impossible.

Why? Why are they insane and why is Bernanke’s policy a failure?

Because his tight wire is flanked by two, conflicting — and destabilizing — forces, only one of which can possibly be countered at any one time.

Destabilizing Force #1
Too Much NEW Debt

The Treasury alone will need to issue a whopping $1.84 trillion in net new Treasury securities this year — just to finance the deficit expected by the Obama Administration.

That excludes any larger deficit due to a worse-than-expected decline in the economy.

It excludes any costs for credit that goes bad (among the trillions that the government now guarantees).

It even excludes the $50 billion additional funding now being contemplated for General Motors … or the hundreds of billions now being demanded by cities and states … or the uncountable billions from any future shoe to fall.

Yes, a lot of people seem to think the Fed can just print all the money it needs and inflate away the problem. But these people have conveniently ignored …

Destabilizing Force #2
Too Much OLD Debt

According to the Fed’s Flow of Funds Report (pdf page 67, Table L.4), at the end of last year, there were $14.5 trillion in Treasury securities, agency securities and mortgage-backed securities outstanding in the world — precisely the ones the Fed has been trying to buy up this year.

The big dilemma: If just 10 percent of those are dumped on the market, it would trigger the sale of $1.45 trillion worth, easily overwhelming the Fed’s purchases.

The bigger dilemma: The main reasons investors sell — fear of inflation and damage to the U.S. government’s credit — are, themselves caused by the Fed’s own buying. In other words, the more the Fed buys, the more our bond investors are motivated to sell.

Bottom line:

• To the degree the Fed rushes into the market to deal with destabilizing force #1 — too much new debt — it merely aggravates destabilizing force #2 — too much old debt. And …

• Ultimately, there’s only one way the Fed can resolve force #2 and convince investors to hold on. It must abandon its efforts to counter force #1. It cuts back or stops its money printing to buy up bonds.

Just a future scenario? Not quite.

My charts above demonstrate that this is already beginning to happen right now: Mr. Bernanke’s daredevil tight wire act is already a failure.

The great day of reckoning of this massive government rescue enterprise is already approaching.

My Recommendations

Do not be deceived by the Fed’s supposedly almighty powers.

Do not get lured in by Wall Street’s hype.

And whenever anyone tells you that a company is “too big to fail,” just remember General Motors.

Good luck and God bless!

Martin