What we have seen is the U.S. government shovel massive amounts of cash into the U.S. financial system and then watch as the big banks sit on that cash and refuse to lend it. The biggest banks in the U.S. reduced their collective small business lending balance by another 1 billion dollars in November 2009. That drop was the seventh monthly decline in a row. In fact, in 2009 as a whole U.S. banks posted their sharpest decline in lending since 1942.

So all of this money that the U.S. government pumped into the financial system has been doing American businesses and consumers very little good. That is why we can have a vastly increased money supply (as you can see from the chart below) and very little inflation.

So if the banks are not lending the money to the American people, what are they doing with it? One of the things they are doing with it is buying U.S. government debt. As you can see from the chart below, U.S. banks have cut business lending by approximately 350 billion dollars since early 2009 and they have purchased approximately 300 billion dollars worth of U.S. Treasury securities.

So instead of loaning money to American businesses and consumers who desperately need it, a ton of this new money is being used to pump up yet another bubble. This time the bubble is in U.S. Treasuries. Asia Times recently described how this trillion-dollar carry trade in U.S. government securities works….

Remarkably, the most aggressive buyers of US government debt during the past several months have been global banks domiciled in London and the Cayman Islands. They borrow at 20 basis points (a fifth of a percentage point) and buy Treasury securities paying 1% to 3%, depending on maturity.

This is the famous “carry trade”, by which banks or hedge funds borrow short-term at a very low rate and lend medium- or long-term at a higher rate. This works as long as short-tem rates remain extremely low. The moment that borrowing costs begin to rise, the trillion-dollar carry trade in US government securities will collapse.

So what happens when this bubble collapses?

Nobody knows for sure. But anyone who has dealt with carry trades in the past knows that when carry trades unwind they can do so very, very quickly and the results can be nightmarish.

The truth is that the U.S. financial system is a house of cards that could fall at any time. A lot of economic pain is on the horizon – it is only a matter of when it comes and how bad it is going to get. Trends forecaster Gerald Celente is predicting that it could be as soon as this year….

But now the problem of mounting national debt is worse than it ever has been before with — potentially dire consequences for taxpayers, according to a report by the nonpartisan Peterson-Pew Commission on Budget Reform.

“It keeps me awake at night, looking at all that red ink,” said President Obama in Nashua, N.H., on Feb. 2. “Most of it is structural and we inherited it. The only way that we are going to fix it is if both parties come together and start making some tough decisions about our long-term priorities.”

Obama will sign an executive order tomorrow that establishes a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how to reduce the country’s debt.

Over the past year alone, the amount the U.S. government owes its lenders has grown to more than half the country’s entire economic output, or gross domestic product.

Even more alarming, experts say, is that those figures will climb to an unprecedented 200 percent of GDP by 2038 without a dramatic shift in course.

“Within 12 years…the largest item in the federal budget will be interest payments on the national debt,” said former U.S. Comptroller General David Walker. “[They are] payments for which we get nothing.”

Economic forecasters say future generations of Americans could have a substantially lower standard of living than their predecessors’ for the first time in the country’s history if the debt is not brought under control.

Government debt, which fuels the risk of inflation, could make everyday Americans’ savings worth less. Higher interest rates would make it harder for consumers and businesses to borrow. Wages would remain stagnant and fewer jobs would be created. The government’s ability to cut taxes or provide a safety net would also be weakened, economists say.

While much attention has been focused on the government’s deficit-spending surge during the recession, many economists agree short-term budget overruns — as ominous as they may seem — are not particularly problematic.

“What threatens the ship are large, known and growing structural deficits,” said Walker, a problem that few politicians seem eager and readily able to fix.

In a recent ABC News poll, 87 percent of Americans said they are concerned about the federal budget deficit and national debt, and most strongly disapprove of how their political leaders are handling the situation.

But public dissatisfaction has not proven enough to compel members of Congress or current and previous Administrations to set aside their partisan differences to achieve a balanced budget.

Most Republicans don’t want to raise taxes; most Democrats don’t want to cut spending. The result is a stalemate on how to put America back in the black.

Keep Reading: ABC NEWS

*Announces $1 billion stimulus fund to promote import substitution

By Frank Jack Daniel

CARACAS, Jan 10 (Reuters) – Venezuela’s Hugo Chavez ordered soldiers to seek out businesses that raise prices after a sharp devaluation of the bolivar currency last week, saying he will expropriate firms that engage in price gouging.

Chavez also created a $1 billion stimulus fund to jump-start the recession-hit, oil-reliant economy before elections in September when the opposition hopes to strip him of a parliamentary majority.

“Right now, there is absolutely no reason for anybody to be raising prices of absolutely anything,” Chavez said on his weekly TV show, two days after announcing a dual exchange system for the weakened currency, which had been on a fixed exchange rate.

“I want the National Guard on the streets with the people to fight against speculation,” Chavez said. “Publicly denounce the speculator and we will intervene in any business of any size.”

Inflation Outlook

Chavez devalued the bolivar as much as 50 percent on Jan. 8 for the first time in almost 5 years, as last year’s decline in oil revenue caused the economy to contract an estimated 2.9 percent, its first recession since 2003. The government set a multi-tiered currency system that Chavez says will stimulate national production by making imports more expensive.

The devaluation may add to inflation by 3 percent to 5 percent this year, Finance Minister Ali Rodriguez said. The government forecast an inflation rate of 20 percent to 22 percent this year, after consumer prices rose 25 percent, according to the National Consumer Price Index.

The socialist Chavez has given the state a hefty role in managing the economy. During his 11 years in office he has nationalized most heavy industries and expropriated large farms. Business and finance are also tightly regulated.

He says the devaluation will help make Venezuelan companies more competitive but warned that the government will take over shops and give them to workers if price rises are uncovered.

Chavez gave out phone numbers during the broadcast to report price gouging and asked his defense minister to prepare an “offensive” against the practice.

After browbeating firms that might raise prices, he announced $1 billion of credits and subsidies to try to diversify the economy and get industry back on its feet. He also invited businessmen to talks with the government.

Venezuela’s economy is largely dependent on oil revenue and slipped into recession last year as crude prices fell and manufacturing and industry output crashed.

“PROTECTING THE POOR”

South America’s leading oil exporter, Venezuela imports most consumer products. Under the new system, food and medicines will be imported at an exchange rate of 2.6 bolivars to the U.S. dollar while nonessential goods will be bought at a rate of 4.3 per dollar.

Since 2005 the bolivar had been fixed at 2.15 to the dollar.

Venezuelans packed electrical goods stores on Sunday, fearing prices will double as the cost of imports rise.

Venezuelans are already struggling with electrical power and water shortages caused by drought, a high murder rate, inflation and recession. But many still support the government because of its focus on easing the economic plight of the poor.

Some analysts say the price impact of the devaluation will not be severe, pointing out that much of Venezuela’s imports are already paid for with dollars bought on a semi-legal black market, where the bolivar is worth about a third of its official rate.

The currency closed at 6.15 to the dollar on Friday.

Others have predicted that Venezuela’s inflation, already the highest in the Americas at 25 percent last year, will be pushed up by the devaluation.

However, the measures would give Chavez more cash to spend this year before the September elections.

He said subsidies introduced by his government, along with the stronger exchange rate for food and medicine, would protect the poor from a jump in inflation.

“This government protects and will continue to protect the weakest with investment and with special attention,” he said.

The devaluation is a relief for the state oil company, PDVSA, which has struggled to pay service providers and meet social spending requirements since crude prices dropped last year.

Foreign debt-holders will also be pleased, since the devaluation improves Venezuela’s finances.

Last month, BMO Capital Markets cut ratings on Colgate-Palmolive Co, Avon Products Inc and Kimberly-Clark Corp to “market perform” saying a possible currency devaluation in Venezuela could hurt the U.S. consumer goods makers’ profits.