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All central banks are desperate to stop stress from building in the global banking system. Despite what they say, job No. 1 of every central bank is to do whatever it takes to prevent a disorderly collapse of banks caused by “bank runs.” These central bankers are crazy, and nothing will stop them from supporting the status quo.

A group of the largest central banks in the world announced a coordinated easing program on Wednesday morning. This will involve printing more of their home currencies and lending these currencies to other central banks, which, in turn, will re-lend these currencies to local banks.

Many European banks have, essentially, been cut off from borrowing in the private credit markets. So central banks are going to ignore the fact that most of these European banks are insolvent and offer them easier and easier access to long-term funding in whichever currency they need to borrow.

The entirely predictable result will be similar to what we see in the US: zombie banks whose assets will feature fewer and fewer private-sector loans and more and more government bonds.

How is this supposed to foster global economic recovery? It seems like a perfect accelerant for global stagflation.

In other words, the world will have plenty of consumers, financed by government budgets, which are, in turn, financed by both compliant private banks and central banks. But will the world have enough producers?

The Fed and most of the other central banks believe the Western economies suffer from “deficient demand” and, therefore face the risk of “deflation.” But I disagree...vehemently. Bad credit needs to default and infirm corporations need to perish if the Western economies are to have any chance of beginning a new phase of renewal and growth.

But that’s not the plan that’s on the table. “Plan A,” in the modern playbook of central banking is to artificially support asset prices and to bail out sickly too-big-to-fail banks. The plan sounds like it could be relatively painless, but it will be extremely painful.

In the end, savers of paper money will pick up the tab — over a multiyear period — for all of these government- and banking-created disasters. The system of government, banking and central banking, as it’s currently configured, will force the responsible to bail out the irresponsible...once again.

Once central banks start lending to insolvent banks, there can be no orderly exit. When sovereign defaults occur — and they will, in Greece and Portugal, and probably Italy and Spain — there will be an acceleration of money-printing to keep the system propped up.

We may even see the Fed and the ECB lend to the IMF, which will re- lend cash to the PIIGS in the form of a “debtor in possession” loan that will, effectively, allow European banks to keep pretending that they have no losses on PIIGS bonds.

Here’s a fun game: Try to imagine your own fiat-money-driven, rule- changing scenario for “rescuing” the Western financial system. There’s a pretty decent chance the central bankers will try it at some point.

But there’s a big difference between press releases that goose the stock market and policies that foster genuine economic growth. This week, for example, the public in Greece and Italy are likely to be furious when their “technocratic” leaders from the banking establishment sign away their sovereignty to the EU and the IMF at this week’s summit. There will be more riots and strikes, which will make the goals of budget austerity even less likely than they are already.

Despite the obvious state of unavoidable depression in the PIIGS economies, the EU and ECB will get more and more radical in their tactics to protect the core EU banking system from collapsing under the weight of credit exposure to the PIIGS. All of this action is being done to protect banks, and as a result, will steadily suck the lifeblood from the private sector.

In short, I am not optimistic.

Therefore, my strategy at the Strategic Short Report remains the same: Identify the likeliest victims of the ongoing credit contraction in the private sector. American Airlines (AMR), a company I urged my subscribers to sell short several months ago was a classic example. AMR just filed for bankruptcy. There will be many more.

Regards,

Dan Amoss,
for The Daily Reckoning