The last plan, to respond to the global financial crisis in 2008, was the mother of all stimulus programs. It was designed to flood the world with money and restore confidence.

Instead, it flooded the world with more debt. Although that plan did prop up markets for a time, taxpayers have paid handsomely for it. It is our debt now. It was transferred from the private to the public sector. We own it, and it’s higher by the trillions.

And now, the “crackpots” of the Tea Party will be parading like the purveyors of great wisdom. Perhaps policymakers did get it wrong, perhaps they should have let the whole show collapse in 2008, let capitalism really take its course and wait for new corporate life to spring up from the dust and ashes.

Unlike Japan, which buried its economic problems and never prospered as before, America’s resilience had always relied on its capacity for boom and bust, for fast regeneration. Instead, this time, it opted for corporate welfare. The moral hazard of this humungous stimulus though could only ever put off the inevitable reckoning that now appears to be upon us.

It may be yet too early to make the call. But this bloodbath on world markets has left the emperor entirely nude. It is quite conceivable, especially as Washington has always danced to Wall Street’s tune, that the plan now, if any, is just to keep printing money till paper currency and therefore $US-denominated debt is rendered worthless.

What other plan could there be? Over the Atlantic, the European Central Bank was buying distressed sovereign bonds with its ears pinned back last night, desperately trying to keep a lid on the crisis as yields on Italian, Spanish and Portuguese bonds were blowing out. Just like the US government, European authorities are now the number one customers for their own debts. It is hardly a sustainable situation.

Indeed the once-lauded US Federal Reserve is merely a private entity controlled by Wall Street banks which brought the crisis on in the first place thanks to its ultra-low cash rate settings, settings designed to appease the share market and the financial elite. Then, in the wake of the 2008 rout, Washington went and gave the Fed another $US2 trillion, by expanding its balance sheet, to buy US government bonds and keep interest rates down.

QE returns?

It is London-to-a-brick that some on Wall Street, and other assorted speculators, even exploited the end of the most recent stimulus plan – the last round of quantitative easing (QE) which ended in June – by once again “shorting” the markets to make a profit.

Let’s explain. Heading into the 2008 crisis, Goldman Sachs and its ilk were short-selling the very structured mortgage products they’d created and advised their clients to buy. We are talking collateralised debt obligations and the likes, products which helped drive the property boom to ridiculous heights.

As world markets consequently blew up, the Wall Street banks were making – on the other side of their ledgers – big profits from these short-sales.

Then they got bailed out by taxpayers for the sake of systemic risk. They were too big to fail, they said. Washington agreed. Amid the host of stimulus programs from which they gained was the first QE stimulus program (whereby the US effectively prints more money via Federal Reserve purchases of US treasuries).

Around this time last year, when markets were first reeling from the Greek sovereign debt crisis the first QE program was coming to a close. No more “play money”. As the share market began to get wobbly and the Wall Street pundits came out in force demanding help from Capitol Hill, the second round of QE was unveiled. Excellent, the market rallied again.

Until QE2 ran out in June, that is. As the fracas over the debt ceiling was unravelling – and masking the real story – many speculators would have plotted their “play money” was running out and promptly gone “short” once again, effectively pushing the market to the brink.

This is rational market behaviour after all. Can’t blame the speculators, only the governments for falling for the “too big to fail” Wall Street begging bowl act.

Only time will tell what policy makers should have done. This latest bloodbath suggests they may have taken the wrong course of action. What we do know, and this is the ultimate paradox, is where the capital is fleeing.

Bond market paradox

When it came to making a profit, the bond market was the place to be this week. The irony is that the US is in such trouble financially, why would any sane investor wish to park their money in US treasuries? The gold price didn’t do much last night, except in $A terms, but bond prices shot through the roof. The US debt market therefore remains the number one “safe haven” destination for capital.

Short term paper even attracted inverse yields! Such was the frantic rush for a safe place to hide last night that banks were even charging their customers a fee for parking money in treasuries. In other words, rather than getting a yield on your money, you pay a fee.

“Bank of New York Mellon said it will begin charging a fee next week on customers who have vastly increased their deposit balances over the past month. The move is the latest sign of the worries roiling global markets,” said a report.

Bank of New York, the biggest custodial bank in the US, said that it will charge 0.13 per cent, plus an additional fee if the one-month Treasury yield falls below zero on depositors that have accounts with an average monthly balance of $50 million “per client relationship,” according to a letter reviewed by The Wall Street Journal.

So now a US 10-year bond yield is just 2.41 per cent. Bear in mind that when it comes to the bond market, prices are the inverse of yields. The prices of all bonds soared last night, driving the yields to their lowest point since 2009. Even though the risk of the US as an investment destination has escalated to new levels, global capital continues to flee into US debt. Even as the prospect for the US ever paying back its debts, or meeting its future obligations, becomes more remote.

Where to hide

It’s a reflection of how desperate things have become. The conundrum: where to put your money? Share markets are overvalued, especially now that the latest ructions will wreak all sorts of dislocations and current earnings forecasts will have to be reined in. Commodities are plunging on the diminishing prospects for global growth and demand. Gold is already sky-high and bond markets are groaning under an ever-rising weight of supply.

Many governments will struggle to just meet interest payments. Against this backdrop, US treasuries have rallied as investors flee for cover. It’s the Armageddon play.

Now then, what’s the plan? There seem to be two choices on the policy menu.

One, the deflation option: let market forces take over, let the defaults begin and provide a social safety net.

Two, the inflation option: keep splashing the cash to reduce the debts to zero. Kick the can down the road. This is clearly the Wall Street option. The proxies in Washington will duly deliver more stimulus, stimulus the public can ill afford, stimulus which could bring another Weimar Republic with its hyperinflation, but stimulus which will diminish the size of the debt.