While it is impossible to predict exactly when such an event will occur, it is almost a near certainty that it will. Dr. Steve Keen, a notable Australian economist, has even gone so far as to dynamically model this financial process. His model demonstrates how speculative financial investment in a pure credit economy will inevitably lead to a severe recession/depression once the speculative debt levels overwhelm the productive capacity of the economy. Despite what they would like us to believe, central banks such as the Fed are not immune to this dynamic and there will soon come a time when quantitative easing is politically impossible and/or financially impotent.
Already, the Fed's "QE Lite" program of monetizing mortgage-backed securities and agency debt has dramatically slowed down as rates have started to climb. Excess reserves held by the investment banks with the Fed increased by $73 billion in the past week, which means that the risk mentality is subsiding and less money is being used for speculation. Sales of new single-family homes shot down almost 13% last month, and 2010 Q4 GDP was "unexpectedly" revised all the way down to 2.8% from 3.2%. As economic data continues to disappoint, leveraged speculation will become increasingly anathema to American investment banks sucking at the teet of the Fed.
The connection between the Fed, commodity price increases and social turmoil may have entered the mainstream dialogue, but it is exactly when the mainstream recognizes a financial trend that it soon reverses.
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