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The Dark Gray Swan: No More Foreign Dollars With Which To Buy US Treasuries

Tyler Durden's picture


Could the next black/green/dark gray swan be so obvious that it has avoided everyone? Well, except for the deputy governor of the Bank of China, who just gave the world a startling reminder of economics 101, when he said that it is "getting harder for governments to buy United States Treasuries because
the US's shrinking current-account gap is reducing the supply of dollars
" Oops.

The funny thing about natural (and economic) systems: they can only be pushed so far before they snap back to default state. With the entire world embarking on an unprecedented spree of domestic bubble blowing to mask the collapse in global GDP, everyone forgot to trade. Zero Hedge has long emphasized that the drop in world trade can only sustain for so long before it brings the current destabilized system back to some form of equilibrium. Because with every country intent on merely printing more of its own currency, whether it is to build bridges or to make the stock of electronic book fads trade at 100x earnings, said countries ran out of non-domestic cash. Alas, this is most critical for the United States, now that Treasury monetization is over, as the US needs to constantly find foreign buyers of its debt to fund unsustainable deficits. Foreign buyers who have US dollars. And according to Shanghai Daily, this could be a big, big problem.

Here is what the BOC's Zhu Min said earlier:

"The United States cannot force foreign governments to increase their
holdings of Treasuries
," Zhu said, according to an audio recording of
his remarks. "Double the holdings? It is definitely impossible."

US current account deficit is falling as residents' savings increase,
so its trade turnover is falling, which means the US is supplying fewer
dollars to the rest of the world," he added. "The world does not have
so much money to buy more US Treasuries

In a nutshell, in printing trillions of assorted securities, the Treasury has soaked up the world's dollars, which due to US banks not lending, is sitting and collecting dust in the form of bank excess reserves. These excess reserves can not be used to buy Treasuries and MBS as that would be literal monetization (as opposed to the figurative one which is what QE has been). And the world is running out of dollars with which to buy Treasuries.

Does this mean that the "world" will be forced to buy dollars, and thus spike the value of the greenback? Not necessarily:

In a discussion on the global role of the dollar, Zhu told an academic
audience that it was inevitable that the dollar would continue to fall
in value because Washington continued to issue more Treasuries to
finance its deficit spending.

A different read of Zhu's statement is that the US should no longer rely on China for funding its bottomless deficits. And if that is the case, things are about to get much worse as the Fed has no choice but to turn the monetization machine on turbo.



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Thu, 12/17/2009 - 22:34 | 168339 johngaltfla
johngaltfla's picture

And PIMCO has raised its cash holdings to the highest levels since Lehman imploded.

This is going to end poorly in Q1. The question is which banks blow their derivatives chunks on to the markets first and the question never answered by the Whiz Kids is what happens when you get 3 standard deviation moves in 10 & 30 year Treasury yields within an extremely short time period and who is going to cover the losses?

Fri, 12/18/2009 - 14:52 | 169062 Anonymous
Anonymous's picture

The Panic Over the Soaring Monetary Base Was a Bernanke Bluff
This is big. It is going to knock for a big loop all those concerned about the inflationary consequences of the soaring monetary base. The Federal Reserve Bank of New York today released a report, "Why Are Banks Holding So Many Excess Reserves?".

Fed economists Todd Keister and James McAndrews state that while the high level of reserves in the U.S. banking system during the financial crisis reflects the large scale of the Federal Reserve’s policy initiatives, it conveys no information about the effect of these initiatives on bank lending or on the level of economic activity. This is another way of saying what I have been saying right along, watch the money supply, not the monetary base.

Keister and McAndrews explain that the buildup of reserves in the banking system is a by-product of the liquidity facilities and other credit programs introduced by the Federal Reserve in response to the crisis. They also discuss the importance of paying interest on reserves when the level of excess reserves is unusually high. But the key point they make remains that the majority of the newly created reserves end up being held as excess reserves and, therefore, the data on excess reserves provide no useful insight into the lending decisions and other activities of banks. Got that? The trillion dollars sitting as excess reserves has had no impact on the economy, and as the Fed stops it's emergency facilities, it is going to be drained. The trillion never went into the economy and never will.

If Keister and McAndrews are correct, and I believe they are, then the Fed will have little problem in ending its emergency lending facility activities. The banks by maintaining those funds as excess reserves (for whatever reason, even if it is simply to earn interest) have in reality kept those funds out of the economic system. As the Fed ends its liquidity emergency facilities they will have to pay back the borrowed funds.

The alarmists, who have thus pointed to the surge in the monetary base as a sign of soaring Fed monetary "easing" and who have been shouting about the inflationary consequences, are going to go into cardiac arrest once they see the monetary base crash when the Fed winds down its emergency facilities and the banks use the excess reserves to pay back the facility funds. The super-decline in the monetary base, as was the super-increase in the monetary base, will of course mean nothing relative to the actual money supply, which is where one should have been keeping one's eyes all along.

In a way Bernanke played a huge shell game on the global financial world. All the so called easing never happened. Let me repeat, what was touted by almost every economist in the world as the extremely loose monetary policy, didn't happen. The money never entered the system. It was a bluff. Bernanke has set us up for Crash II and few see it coming. I wouldn't want to play poker against him.

Read the full Fed report here

UPDATE: I want to emphasise that the purpose of this post is to show that looking at the monetary base instead of the actual money supply was an error and that as the report says the reserves that were simply excess reserves had no impact on the economy. However, the Fed report does to some degree imply that the trillion in excess reserves is with one set of banks and the extra credit facility money is with another set of banks. I do not believe this is the case, or Bernanke better hope it is not the case as he stops the emergency credit facilities. I will have more on this tomorrow in Part 2.

Thu, 12/17/2009 - 22:35 | 168341 RobotTrader
RobotTrader's picture


Looks like they were buying en masse today....

TIME 3-Month 0.000 03/18/2010 0.04
0.002 / .002 21:21 6-Month 0.000 06/17/2010 0.15
-0.012 / -.012 21:00 12-Month 0.000 12/16/2010 0.33
-0.04 / -.041 21:00 2-Year 0.750 11/30/2011 99-30+
0-03½ / -.057 21:20 3-Year 1.125 12/15/2012 99-16+
0-07½ / -.080 21:17 5-Year 2.125 11/30/2014 99-16½
0-15½ / -.104 21:17 7-Year 2.750 11/30/2016 98-20½
0-21½ / -.109 21:18 10-Year 3.375 11/15/2019 99-04½
0-31½ / -.120 21:18 30-Year 4.375 11/15/2039 99-09+
1-24 / -.108 21:00


Thu, 12/17/2009 - 23:18 | 168383 Anonymous
Anonymous's picture

LMAO...Robot's a trip...but you knew that.

Thu, 12/17/2009 - 23:21 | 168386 SloSquez
SloSquez's picture

LMAO - Robo's a trip...but you knew that.  Thanks!!!

Fri, 12/18/2009 - 00:01 | 168431 Smu the Wonderhorse
Smu the Wonderhorse's picture

So if it's not China, who is buying this stuff?  The primary dealers who then offload them to the Fed?  Is that it?  If not, who?  Tisn't me.

Fri, 12/18/2009 - 01:58 | 168516 Pedro
Pedro's picture

I guess if primary dealers buy them, then the fed buys them from the dealers, that would mean that ultimately the printing press is buying them which then would mean we taxpayors are buying them because the printing press will buy so much time before a financial crisis begins. 

So, Tis you (and me).

Fri, 12/18/2009 - 05:32 | 168557 Pondmaster
Pondmaster's picture

I understood that the "primary dealers" were short on cash , which is why uncle shill is turning MM fund reverse repos( though they deny all but "experimental tests". ) Low on cash , no buying the endless stream of worthless U.S. debt   . Who is buying , besides the tis's 

Fri, 12/18/2009 - 08:05 | 168578 bonddude
bonddude's picture

Q "Why do you rob money market funds?"

A "Cuz that's where the $ is"

Fri, 12/18/2009 - 08:27 | 168585 Hephasteus
Hephasteus's picture

I was surprised they turned off the buck breaking action so fast last crash. Me thinks this next one they won't be able to.

Thu, 12/17/2009 - 22:35 | 168342 lsbumblebee
lsbumblebee's picture

Tell me again how this is deflationary.

Thu, 12/17/2009 - 23:04 | 168368 docj
docj's picture

My totally uneducated wild-ass guess: it's delfationary short (perhaps very short) term as dollars dry-up, the excess sitting as reserves that can't be released lest C, JPM, WFC no longer be able to fake solvency, and consumer/sheeple continue to buck TPTB and either save their cash, convert to assets, or pay-down debt - all of which takes more dollars out of the system and is also deflationary.

Once Barry/Timmay/Ben have no choice but to monetize, that snaps through equilibruim from deflation to inflation, probably parabolic, very quickly (especially given our baseline debt and current account deficit levels, both of which will only get worse).

Again though, that's just a totally uneducated guess.

This much I'm not guessing about though: it ends poorly, for all of us.

Thu, 12/17/2009 - 23:19 | 168384 lsbumblebee
lsbumblebee's picture

No argument here. I'm addressing those that believe we face deflation in the long run.

Thu, 12/17/2009 - 23:45 | 168418 Anonymous
Anonymous's picture

Deflation is the midwife of hyperinflation.

Fri, 12/18/2009 - 00:10 | 168436 lsbumblebee
lsbumblebee's picture

No argument here. I'm addressing those that believe we face deflation in the long run.

Fri, 12/18/2009 - 02:08 | 168519 Rick Blaine
Rick Blaine's picture

Who have you heard who thinks that we are facing deflation in the long run?

I've heard quite a few arguing for it in the short run...but they all seem to think eventually the tide will shift.

Fri, 12/18/2009 - 08:54 | 168591 Internet Tough Guy
Internet Tough Guy's picture

Roubini, Prechter, etc.

Fri, 12/18/2009 - 13:08 | 168888 cougar_w
cougar_w's picture

Roubini is basing his US medium-term deflation call on reduced incomes and increased savings. Households have no money. No money, no buying. No buying, no upwards price pressure, widespread BK in retail and resulting impact on household incomes. Rinse & repeat. Everything falls inwards a little more with each turn around the wheel. That's why it's called a "death spiral".

It isn't always about abstractions, ya know. Households are being eaten alive.


Fri, 12/18/2009 - 13:25 | 168916 AnonymousMonetarist
AnonymousMonetarist's picture

There is no such thing as deflation in the long run.

Deflation with sound money corrects itself.

Deflation in fiat can only end one way ... folks here seem to have all gotten that memo ... if y'all are unsure perhaps this will set the mood music ...

Fri, 12/18/2009 - 00:13 | 168441 Cursive
Cursive's picture

People often make the mistake of talking about printing presses.  That is powerful imagery, but it is wrong.  Much of the QE is done to offset the contracting credit.  If you include credit in your money supply calculations, you will see that we are in a deflationary period.  Japan has been doing this for over 20 years.  Not saying that the Japanese scenario is exactly what we'll face, but it and our own Great Depression are emprical examples of prolonged deflationary periods.

Fri, 12/18/2009 - 00:20 | 168444 lsbumblebee
lsbumblebee's picture

I don't understand how debasing our currency, any currency, is deflationary.

Fri, 12/18/2009 - 01:01 | 168480 Anonymous
Anonymous's picture

The currency that is being debased is only a small portion of the total "money" in circulation. The bulk of the "money" in use is credit, and the amount of outstanding credit is shrinking faster than currency debasement can keep up with.

It's worth noting that it is also doing this massive shrinkage at a time when banks are loathe to actually recognize much of the shrinkage by actually dealing with loan defaults. Extend and pretend is their attempt to prevent the deflation from hammering their loan portfolio... It's gonna fail, but that'll continue to take a while.

Fri, 12/18/2009 - 11:03 | 168669 Cindy_Dies_In_T...
Cindy_Dies_In_The_End's picture

Shrinkage..makes me think of George from Seinfeld.heheheh

Fri, 12/18/2009 - 13:17 | 168905 Art Vandelay
Art Vandelay's picture


Fri, 12/18/2009 - 14:24 | 169016 Orly
Orly's picture

Exactly the right concept.  It is all about credit and the velocity of money (i.e., "credit expansion"...), which hit the wall in 2007 and is falling precipitously toward the floor as we speak.

Deflation in this scenario is inevitable.  The plan is to have a load of cash on hand for the bottom and turn around and buy every three-bedroom home in my neighborhood that I can get my hands on.

Fancy-free income for life.

Mon, 12/21/2009 - 17:26 | 171143 Anonymous
Anonymous's picture

And then pay the PROPERTY TAXES on each of them as bankrupt municipalities crank up the tax revenue.

I remember, prior to the 70's, everyone owned their car. They went to an auto dealership and got a loan (either through their bank or the dealership), and they owned the car after 3 to 5 years.

Then after the 70's, into the 80's, all of a sudden nobody could afford to buy a car anymore, and they never did again -- even through the ''roaring 90's'' -- and now I can clearly see what's coming with Real Estate.

Housing prices may (probably will) collapse to numbers not seen since the 80's, but the cost of PROPERTY TAX will shoot so high as to cause the actual net cost of ownership to be as high as it is now. I feel sorry for anyone who thinks property will be the route to future prosperity.

Think "ancient Rome" during it's final collapse...

Mon, 12/21/2009 - 17:32 | 171148 Anonymous
Anonymous's picture


In my reference to car ownership, I was referring to buying as opposed to LEASING, which is what car ''ownership'' became after the 70's.

Fri, 12/18/2009 - 01:28 | 168497 dnarby
dnarby's picture

From my understanding...  It's an easy thing to misunderstand.

TTBOMK, you need to realize that we don't even have a fiat currency.  If we did, we'd have a set number of dollars out there, that are periodically diluted by creating more dollars.

But instead, we have *fiat debt*, because for each dollar that's created, we also create a dollar's worth of debt - And that debt needs principal and interest payments made on it.

As long as the debt grows steadily and in sync with population & production, everything is fine.  If it grows too quickly, it does a Chernobyl on your ass.

I could be wrong, and look forward to any clarifications or corrections necessary.

Fri, 12/18/2009 - 01:43 | 168509 lsbumblebee
lsbumblebee's picture

Sorry. I call bullshit.

Fri, 12/18/2009 - 01:54 | 168513 Anonymous
Anonymous's picture

Then why don't you explain it to us all Einstein? Or are you going to keep asking the question until you either run out of people to insult or get the answer we all know you've already come up with on your own?

Fri, 12/18/2009 - 12:37 | 168813 Ripped Chunk
Ripped Chunk's picture

+1  stomp on all trolls

Sat, 12/19/2009 - 01:45 | 169688 JR
JR's picture

Isbumblebee a troll?  Huh-uh! Isbumblebee sparked a very informative conversation, Ripped Chunk.  Very sophisticated people are on both sides of the inflation/deflation question.  You can read pros and cons everywhere.  The published economists are on both sides.  So why wouldn't it be okay for someone to ask a question about it, and be persistent?  What would worry me is someone who actually claims he knows what is going to happen, because with the government being the mysterious partner in bed with you, you don't know what to expect.  And "Fed economists" work for the Fed!

It takes an informed and confident person to ask questions: most people are afraid to ask questions because they think it will make them appear ignorant. As a consequence, we are all more ignorant. This blog is a gold mine of experts outside the run of the mill mainstream;  the more questions asked here and answered, the richer, literally, we are!!! 

Sat, 12/19/2009 - 13:04 | 169910 harveywalbinger
harveywalbinger's picture

"... most people are afraid to ask questions because they think it will make them appear ignorant."

This statement is the verbal equivalent of a prime number. This is indeed a profound insight and one which is universally applicable.

We are vain little creatures aren't we...

+1 trillion

Fri, 12/18/2009 - 10:30 | 168642 economicmorphine
economicmorphine's picture

The short answer is that the amount of credit being destroyed is greater than the amount of money being created.  Until that stops, deflation.  When it stops, inflation, probably of the hyper variety because, yes, deflation is the midwife of hyperinflation....but only to those governments who are unwilling to accept it.  I'm even more fundamental than that.  I think deflation is not such a bad thing.

Fri, 12/18/2009 - 12:38 | 168818 Ripped Chunk
Ripped Chunk's picture

In moderation over a relatively short time frame.

Fri, 12/18/2009 - 11:59 | 168736 RagnarDanneskjold
RagnarDanneskjold's picture

The Fed isn't literally printing money. They aren't creating pieces of paper, or even 1s and 0s unbacked by assets in most cases (QE changed that). The Fed buys existing assets which the bank owns. In order to have unbacked money creation, they need to fire up the printing presses and create physical currency that will survive a default, or they need to buy straight from Fed gov. The latter seems most likely, but even now the Fed says they will stop in 2010.

Whether you agree it will happen or not, Japan just debased its currency, hard core, for 20 straight years and their nominal GDP is at about 1994 levels. That's where Roubini is coming from.

Fri, 12/18/2009 - 16:54 | 169198 Anonymous
Anonymous's picture

The FED is buying toxic assets at way over any possible market value. Whatever money they spent over and above any sane valuation is indeed money not backed by assets.

Fri, 12/18/2009 - 12:00 | 168738 trav777
trav777's picture

mostly correct.

The problem with debtmoney is that it requires someone ELSE to borrow to pay your interest.  It's very clear if you think about this that it is a ponzi scheme.

The interest that the other guy must pay on his loan represents interest upon interest.  This is an exponential compounding problem.

No money comes into existence except by lending.  It all must be paid back plus interest.

Long as there are people demanding loans to do things that produce more stuff, someone else will have to borrow money into existence to buy that stuff, but then they have to find someone else to borrow money into existence to buy their stuff to pay the interest on their loan which paid the interest on your loan of money, etc.

This is a pyramid scheme, in essence.  Once production in the aggregate peaks, the system begins to eat itself.  Money in the system starts getting needed to pay existing interest claims and the interest starts to eat the money supply.

Fri, 12/18/2009 - 15:49 | 169113 dnarby
dnarby's picture

Thanks, I agree.  I had thought I figured that in, next time I'll try and add that more clearly to my "sum up deflation in 200 words or less for idiots" essay. XD

Fri, 12/18/2009 - 21:46 | 169507 BRAVO 7
BRAVO 7's picture



Fri, 12/18/2009 - 13:35 | 168936 ATG
ATG's picture

None necessary.

You nailed it, exactly what inflationistas

fail to comprehend, that high gold prices

and low bond yields signify defaulting

devouring deflation sdepression not seen in

four generations. No wonder monopoly media

call it a recession that is over...

Fri, 12/18/2009 - 03:06 | 168537 saturno_v
saturno_v's picture



During the Great depression we experienced a long period of deflation because we were still on the Gold standard.

After we severed that link and the FDR gold confiscation event, suddenly we had inflation.

There is nothing preventing an enough determined government in a fiat currency regime to create inflation.

In Japan the CPI actually never went negative, they suffered serious asset deflation. On top of that Japan did not print in overdrive, afterall their unemplyment rate was never over 4.5-5% (what we would consider full employment here) and calculated with a less "massaged" methodology...and their trade balance has always been positive.

We are into this crisis with a serious trade deficit and a real unemployment rate at 18%...our industrial infrastructure is shot.


Fri, 12/18/2009 - 12:17 | 168762 ATG
ATG's picture

After the banking holiday and 69% devaluation of

the gold dollar in 1934, we had less than a year

of 7% inflation, and then nothing, because of

the negative money multiplier like we have now.

Real GDP contraction and unemployment continued

until well after WWII like now. There is no magic

in neoKeynesian free lunch. Someone always pays

the bill, usually borrowers, consumers, shareholders


and taxpayers with foreclosures, market and

social contract defaults.

Productivity creates jobs, profits and savings,

not government. Take a good look at

Shadowstats M3 growth going off a cliff since

2008. Usury ultimately causes deflationary

defaults, one reason it was proscribed by ancient

texts. Get ready for the next round of deflationary

default denials led by Credit Cards, CRE and Euros...

Truly there is little new under the sun...

Fri, 12/18/2009 - 15:55 | 169124 dnarby
dnarby's picture

I would argue that the reason we went into deflation wasn't the gold standard, but irresponsible lending.

However, your point that inflation didn't happen until after FDR stole the gold is a good one.

I would argue though that once unservicable levels of debt have been reached (per Steve Keen's ) a determined enough goverment would have to first change their money from debt based to a fixed amount in order to achieve inflation.

Fri, 12/18/2009 - 10:35 | 168646 Anonymous
Anonymous's picture

We are not in deflation in the broad based sense where all prices are falling. Go to the supermarket, things are noit very much cheaper than two years ago. We are in debt deflation, which might have been a cleansing excercise, even it it would have been painful. This will be met with increasing the money supply, and it is potential future threat this that is discounted by gold. REad QBs excellent outlook for more on this subject, they explain it in great detail and with a clarity that I haven't seen many other places.

The causal chain is debt deflation -> threat of future monetary inflation -> rising gold prices. Actual present time inflation such as that measured by the CPI is not a necessary precursor of higher gold prices. It is the perception that it will come that lifts hard assets.

As such, gold is not irrrational at 1100 dollars as some people say. If the us continues to debase the dollar, gold will keep going up. Simple as that. So will they? Yes. Because we are still in debt deflation, and more stimulus is going to be introduced.

As fiscal stimulus and monetary stimulus take hold and banks start lending, the trillion dollars in excess reserves will be grown throught the reserve multiplier as banks loan, lend, loan lend etc, historically about a sevenfold multiple of the excesss reserves. Unless you think the Fed will know EXACTY when to time a monetary contraction to mop up liquidity, chances are there will be an actual inflation problem.

Interestingly, the output gap estimations of bernanke are subject to a lot of debate - he might be underestimating the effects of debt deflation. In that case, the easy money policies will stay in place even longer and gold should benefit from that too.

Fri, 12/18/2009 - 12:25 | 168778 ATG
ATG's picture

Gold had irrational exuberance at 1226.40

and still irrational at $1100. Maybe $970.

Debt default deflation is not good for bonds,

commodities, gold, stocks or real estate.

It benefits actual physical dollars, one reason

Bill Gross has been raising cash.

Anyone who does not appreciate this may

be taken to the reaper...

Fri, 12/18/2009 - 15:57 | 169129 dnarby
dnarby's picture

True, but as currency fears rise, gold will as well.  Or rather, it won't fall as fast as other assets on the pullbacks.

Fri, 12/18/2009 - 22:59 | 169571 barthezz
barthezz's picture

QBs excellent outlook for more on this subject ----


where do I find this outlook?



Fri, 12/18/2009 - 13:27 | 168919 AnonymousMonetarist
AnonymousMonetarist's picture

Inflation expectations were well anchored during the Great Depression and in Japan.

Fri, 12/18/2009 - 09:25 | 168607 docj
docj's picture

Heh - sorry.  Forgot whom I was addressing for a minute!

Cheers -

Fri, 12/18/2009 - 02:25 | 168525 dot_bust
dot_bust's picture

So will it soon cost me $15 for a loaf of bread? Zoinks!

Fri, 12/18/2009 - 08:56 | 168593 Internet Tough Guy
Internet Tough Guy's picture

More likely it will cost you four pre-1964 quarters.

Fri, 12/18/2009 - 09:29 | 168608 docj
docj's picture

Pre-1965, no?

Oh, and +1

Fri, 12/18/2009 - 11:07 | 168675 Anonymous
Anonymous's picture

Five rounds of .22.

(-18) plus equals -17

Fri, 12/18/2009 - 07:16 | 168564 Quantum Noise
Quantum Noise's picture

It is really simple. The fractional reserve banking system REQUIRES the ever expansion of the OVERALL debt present in the banking system. In short, debt is money. If no more debt is issued, no more money will be created. Worse, if debt is paid off or defaulted, money is destroyed... and hence deflation. Currently people are doing both: defaulting and paying off their debt... which forced Ben to take more debt to offset this loss of money. This is exactly Hugh Hendry's point when he always tells people to look not only at the amount of money Helicopter Ben is printing, but also at the amount of debt (which again, is money) that is being defaulted or paid off. The truth is that Ben is losing... he should actually print more... again Hugh Hendry's point (I know, this sounds crazy to most people, but again, most people don't have a clue how money is created or destroyed).

Here's what you should know:

Money is debt:

Hugh Hendry:

Fri, 12/18/2009 - 09:13 | 168601 FLETCH
FLETCH's picture


But the fundamental issue is that the level of $$ is coming down to match the TRUE PRODUCTIVITY OR EARNINGS of our society.  Just printing (adding debt) to the system without increasing earnings leads to lack of service which equals default.

That is what's happening here in slow motion; that is deflationary.




Fri, 12/18/2009 - 12:05 | 168743 exi1ed0ne
exi1ed0ne's picture


Credit money is being destroyed at an alarming rate, and Ben is jucing the dollar money supply to compensate. It's been nothing but trying to backfill, which is why inflation is at a standstill or negative.  We will get to a point where there are too few dollars available to pay down debt and job losses should stabalize (30%? 50%?).  Credit money destruction (through payback or default) will slow.  It's at that point when all the dollar money creation will crest like an inflation tsunami.


Or not.  :)

Sat, 12/19/2009 - 04:06 | 169773 Anonymous
Anonymous's picture

The "money as debt" video played over Marla's mix is awesome.

Thu, 12/17/2009 - 22:41 | 168344 drbill
drbill's picture

Could this be the end of the circle jerk that's been going on? Or does the Fed just find another way to give out more dollars so other CB's can continue to buy more treasuries? Either way, it seems to me that something has got to give. The only question is will it be sooner or later?

Thu, 12/17/2009 - 22:56 | 168354 chumbawamba
chumbawamba's picture

Maybe Ben will helicopter drop a few hundred billion FRNs into Tiananmen Square to help them along.

I am Chumbawamba.

Thu, 12/17/2009 - 23:08 | 168372 Cistercian
Cistercian's picture

 Probably.Ben is evil.

I have said it before... epic currency fail imminent.


Fri, 12/18/2009 - 12:29 | 168795 ATG
ATG's picture

Clueless Cs in Gaza:

Take a good look at M-3, cooling down since 2008

with deflationary assets. This is not currency fail -

it is dollar scarcity...


Fri, 12/18/2009 - 14:07 | 168987 chumbawamba
chumbawamba's picture

Ok, Ariel.  Say, how is that coma working out for you?  Have you managed to move your big toe lately?

Why don't you go hang out on Densenger's forum and spew your deflationist nonsense where it would be met with the proper amount of drooling.

I am Chumbawamba.

Fri, 12/18/2009 - 14:37 | 169040 Orly
Orly's picture


Fri, 12/18/2009 - 14:53 | 169063 chumbawamba
chumbawamba's picture

Yes, Orly, we know you're clueless, which is why you lost your law license trying to prove Obama wasn't an American citizen when anyone who has a few brain cells knows that once the Bilderberg Group selects its figurehead for the position of US President then there's no chance in hell he'll be removed from office.

You fucking zionists can scream all you want, your dream of a racist state backed by a world superpower is fading, but fast, and you know it.

Sucks being you.

I am Chumbawamba.

Fri, 12/18/2009 - 16:09 | 169146 dnarby
dnarby's picture



"...There will come such a time in the near future, when the flight from risk assets, engineered by the Fed, will become as pervasive as today's dollar carry trade. Ultimately the Fed is more interested in low rates than 100x+ P/E's (one hopes, or else a gaggle of retarded monkeys can do Bernanke et al's job better). And with Treasury QE done, and MBS being gamed to the point where the FRBNY is doing all it can to obfuscate just what is really going on in that particular market, one can be sure that Bernanke will be all too happy to sacrifice equities at the bond altar."


Now say your sorry or I'm going to get snarky on your ass.

Fri, 12/18/2009 - 16:21 | 169163 Orly
Orly's picture

You're a sad, strange little man and you have my pity.

Sat, 12/19/2009 - 13:33 | 169933 chumbawamba
chumbawamba's picture

Haha, thanks.  But still, sucks being you.  How does it feel to have "FAIL" permantently emblazoned across your forehead?

I am Chumbawamba.

Thu, 12/17/2009 - 23:24 | 168389 aint no fortuna...
aint no fortunate son's picture

dollar fell and stock futures rallied on the news.

bernanke can't look like he's trying to talk down the dollar in the middle of confirmation hearings that are starting to look like yesterday's breakfast - is he getting the Chinese to do it for him?

Thu, 12/17/2009 - 23:04 | 168366 RobotTrader
RobotTrader's picture

Step 1:  Sell down stock markets

Step 2:  Investors "flee" into Treasuries and Dollars

Step 3:  Risk assets such as gold and oil are dumped

Step 4:  Float billions in new freshly printed debt at 2% or less

Step 5:  Announce new "spending" or "stimulus" program

Step 6:  Stocks launch worldwide fueled by "Animal Spirits"

All financed by 40-year low interest rates


Wash, Rinse, Repeat


Thu, 12/17/2009 - 23:10 | 168375 tip e. canoe
tip e. canoe's picture

all hail king dolla

Thu, 12/17/2009 - 23:16 | 168380 Hephasteus
Hephasteus's picture

The king is dead. Long live the new king amero. Though the birth defects make that not possible. It's always fun to TRY!!

Fri, 12/18/2009 - 00:45 | 168463 tip e. canoe
tip e. canoe's picture

it may be dead, but it's a dead that lives on LIVING FLESH

Thu, 12/17/2009 - 23:14 | 168378 Quantitative Wh...
Quantitative Wheezing's picture

Steps 1-5 are right-on, but the animal spirit of fear will drag down asset prices for years to come.

Thu, 12/17/2009 - 23:14 | 168379 lsbumblebee
lsbumblebee's picture

Don't forget "Fed announces liquidity drain". That could be step 1a.

Thu, 12/17/2009 - 23:25 | 168391 deadhead
deadhead's picture

gotta go with robo here.....just don't know about step is for real i think because fiatscos really have passed the comical stage. oil will probably always go up because of the "peace" process in the mideast.  unless the usa invades canada and we take the oil shale pits!

Thu, 12/17/2009 - 23:36 | 168407 lsbumblebee
lsbumblebee's picture

Might as well invade Canada. Congress just gave the Pentagon another $600 billion.

Fri, 12/18/2009 - 00:52 | 168470 i.knoknot
i.knoknot's picture

agreed. on step three the 'bet' seems to be between a run to dollars (historic precedent), or a run to other 'safe haven' assets given the dollar's recent mis-management. then there is short-term wisdom, and long-term discipline with respect to the dollar. right now it seems to be quite a mess, but it's a resilient beast, that dollar.

if you go with history, we should see gold dumps like today as the dollar spikes up.

if the dollar is as toast as we think, gold/oil/commodities (stuff...) should show strength instead, or at least rise in concert with the dollar?

that flight to dollars (e.g. pimco) is a strong habit to break when fear enables the primal investor instincts...

Fri, 12/18/2009 - 05:03 | 168553 chumbawamba
chumbawamba's picture

Copper has retraced it's highs of last year.  Or if not then pretty close to them.  I'm certainly enjoying the boom.

I  am Chumbawamba.

Fri, 12/18/2009 - 12:56 | 168854 ATG
ATG's picture

Copper an outstanding short

along with precious metals etc.

The bloom is off the rose and

the boom is in the dollar...


Fri, 12/18/2009 - 13:43 | 168946 chumbawamba
chumbawamba's picture

Yeah, knock yourself out with that trade, big guy.

I am Chumbawamba.

Fri, 12/18/2009 - 14:42 | 169047 Orly
Orly's picture

Since the yen- also a "safe haven" currency looks to get pummelled when it all hits the fan, the only other option for people looking for liquidity will have is the Swiss Franc (CHF...).  Look for the CHieF to re-establish itself as a world premier currency for the "select" bunch, as there really aren't enough of them to go around.

Supply and demand.  The CHieF goes through the roof, along with the USD, the "safe haven" of choice.

Fri, 12/18/2009 - 00:59 | 168475 DoChenRollingBearing
DoChenRollingBearing's picture

Yeah, I'll go with the gold.  My bank today just told me that they will release some income to me!  I think that I will deploy 50% into gold Eagles and 50% in FRNs.

And then when we come to that point where deflation turns to (hyper?) inflation, I will use my strong dollars to get real Au, Pt, Ag.

Great financial minds think alike (esp. those in their mid 50s).  But, Canada is next to us, we are their best market re shale oil.  No need to invade!  NAFTA and our common heritage will keep us reasonably happily linked.

Robo, DH and ZH in general rock (I roll)!  Love this hangout!

Fri, 12/18/2009 - 13:42 | 168942 ATG
ATG's picture

How are those Eagles bought at a premium

working for you?

Fri, 12/18/2009 - 15:51 | 169115 chumbawamba
chumbawamba's picture

How are those equities for which you paid a commission

working for you?

I am Chumbawamba.

Thu, 12/17/2009 - 23:32 | 168402 Anonymous
Anonymous's picture

Japan and the UK will prove that there is a debt limit, just not the ones the politicians set.

Thu, 12/17/2009 - 23:56 | 168426 Vulgus Porkulus
Vulgus Porkulus's picture

If only Timmy-G & Co. were smart enough to finance at the long end.  I'm a dummy and even I couldn't pass up 4.75 for 30 years, they went for the 5/1 option am I missing?

Fri, 12/18/2009 - 06:49 | 168562 Apocalypse Now
Apocalypse Now's picture

You are missing parabolic debt, best viewed in chart form.

We used to be able to pay off the principal of our debt, now we couldn't pay off our debt if we cut all government spending.  Then we couldn't even make interest payments without borrowing to pay the interest because of our budget deficits - this would be like starting a new credit card to pay the interest payments on your other credit cards.  Because we can't even pay the interest on our debts while our debts are growing, the only solution is to reduce the interest percentage so the models, economy, and dollar can buy some time. 

It is literally a cash flow ponzi scheme right now, we are in an unusual situation because our military might and consumer purchases (imports from foreign creditors - they have used the proceeds to buy treasuries) keep the US suspended in animation when it should have crashed. 

If we can hold 0% interest, we will have created the equivalent of the perpetual motion machine or nuclear fission in finance - parabolic debt can continue towards infinity.

Weimar is a horrible comparison since they had a feedback mechanism in Union contracts that increased pay to workers by contract (we have no mechanism for wage increases that would dramatically increase prices in the market).  All the government printing is staying within government contracts (corporate gov contracts) and simply backstopping the large banks.  Notice money + credit is contracting, it is impossible to have inflation in this environment.  Private business is contracting (deflationary) because government borrowing is squeezing out private industry while government is monetizing (inflationary) in an attempt to counteract the contraction (money + credit).  Weimar also had loans in foreign currency they had to pay back, and they lacked alternative options since they were not the worlds superpower (they lacked creative solutions and leverage).

The Great Depression is a poor comparison since the US dollar was backed by gold and the US was not the world's only superpower and the dollar was not the reserve currency.  This limited the options the US had.

US vs Euro vs Yen are hobsons choices, all countries of the world are debasing their currencies with printing beyond hard asset reserves.  UK and Japan will default before the US, and the Euro will be just as challenged with its sovereign country defaults.  If the US can keep interest rates low we may win in this musical chairs game - the last one with a chair wins.  However the real geopolitical game going on is the western world against the east (China, Russia, Iran + Venezuela in SA) and we are attempting to get China to depeg.  If the Gulf oil OPEC/currency group sides with this block there could be a very powerful contender to challenge the US/UK/Israel hegemony as their currency could be backed by oil and gold (once china begins to diversify their dollar assets into gold and if the middle east ever gets its gold back from the london vaults that they requested).

With China diversifying out of the dollar and into hard assets like copper, they have driven prices up on some of those basic materials.  They could do the same with gold or any other asset class they chose to diversify into while cashing in dollars.  They have also strategically gone into shorter duration so that they have greater strategic leverage with their reserves (more than 30 year treasuries rolled that mature each year).

Government spending is crowding out private spending and will act like a black hole sucking everything in with the mass of the debt and quadrillion of derivatives we could go supernova.  There is no limit to the amount of printing but there is no mechanism for distribution outside of those connected to the government.

Many of the worlds largest corporations (whose CFOs are more credible than BB or TG) are openly referencing current DEFLATIONARY trends in their business commentaries/annual reports.  What many see as inflation within asset classes is often just remaining capital flowing between asset classes and country capital pooling.  The mega categories showing deflation include  1. Derivatives within the shadow banking world; 2. The supply of Credit; 3. Real Estate.

Having said that, remember the words of one of our founding fathers that if banks were ever to control the money supply that they would take over, first by inflation then deflation.  We have had a a huge inflationary period from 1980-2007 followed by two years of deflationary conditions that persist today.  They are trying to reflate the asset class bubbles but it is difficult from the top down with no job or income growth - the best they can hope for is flat (Japan).  The elites want regional currencies, they have the euro, a south american group they are standardizing, a pan asian currency in the works, the gulf oil countries currency, and they want a North American currency - so they may sacrifice the dollar (planned devaluation and introduction of the Amero).

As an individual that is living in the property (I presume) that is a good rate if inflation kicks in - if hyper inflation occurs it will be a steal.

Fri, 12/18/2009 - 07:40 | 168572 Quantum Noise
Quantum Noise's picture


Fri, 12/18/2009 - 10:34 | 168645 Chumly
Chumly's picture

Henceforth, MPD rules!!!

Fri, 12/18/2009 - 10:43 | 168652 Chumly
Chumly's picture

We have had a a huge inflationary period from 1980-2007 followed by two years of deflationary conditions that persist today.


EXACTLY!! - We exported our inflation through the Grand Ponzi Scheme (GPS) called "globalization."  Inflation begets deflation, but desperation will beget chaos as the system comes apart at the seams (already in motion as we know).

Fri, 12/18/2009 - 11:59 | 168737 Anonymous
Anonymous's picture

"...the only solution is to reduce the interest percentage so the models, economy, and dollar can buy some time."

'Buy' time for what? To find the shotgun, dust it off & blow our brains out?

Fri, 12/18/2009 - 12:38 | 168819 ghostfaceinvestah
ghostfaceinvestah's picture

"Weimar is a horrible comparison since they had a feedback mechanism in Union contracts that increased pay to workers by contract (we have no mechanism for wage increases that would dramatically increase prices in the market). "

I guess you missed the part about government workers at all levels with automatic annual pay increases.  Workers at all levels of government will be getting pay bumps this year, that are not tied to CPI.

This doesn't even count the new positions created in government at ever-increasing pay rates.

I do agree with your contention that government is becoming a black hole, more now than at any time in history, but as that happens, increasingly public-sector wages will respond directly to money printing and public-sector spending.

Private sector wages, of course, will not, drawing more folks into the public sector.

Fri, 12/18/2009 - 13:49 | 168953 ATG
ATG's picture

What good is a government pay increase when

you are furloughed or laid off because tax revenues

have dried up? Governments are upside down and

increasing the debt load increased unemployment claims.

2010 the first year in decades there was no COLA

increase. Public sector jobs as in Census Taker

around $11/hour part-time without benefits

before deductions?

Fri, 12/18/2009 - 19:36 | 169273 Apocalypse Now
Apocalypse Now's picture

I didn't miss that one GFI, "There is no limit to the amount of printing but there is no mechanism for distribution outside of those connected to the government.  Government workers are definitely connected to the government.

The agreed upon increase this year by Obama was a 2% increase for government workers while social security recieved 0% for a cost of living adjustment (COLA).  That is called buying votes and will not come close to offsetting the lost wages in the private sector.  I may not have mentioned this but the Weimar Union contracts were tied to immediate wage hikes in response to inflation rates - so it was actually stuck in a perpetual self-reinforcing hyperinflationary spiral.

Now, if BB put his helicopter over tent cities or made all lottery tickets pay off (a better solution would be to have policies that stimulate job growth so capital can be allocated more fairly and less arbitrarily than to friends of the president) then we might see a mechanism for stabilizing/inflation of the private sector.

Sat, 12/19/2009 - 03:11 | 169739 JR
JR's picture
Speaking of the growing disparity between private and public sectors wages, this, from Mish: December 11, 2009 

At a time when incomes are plunging for the private sector middle-class, More Federal Employees Get Six-Figure Salaries.

The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data.
Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months — and that's before overtime pay and bonuses are counted.
Federal workers are enjoying an extraordinary boom time — in pay and hiring — during a recession that has cost 7.3 million jobs in the private sector.
Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.
The growth in six-figure salaries has pushed the average federal worker's pay to $71,206, compared with $40,331 in the private sector.

How the $!!! can the department of transportation possibly justify 1,690 workers making in excess of $170,000?

The Federal Aviation Administration also has 1,700 workers making in excess of $170,000.

The Department of Transportation was established by an act of Congress on October 15, 1966. Now there are over 56,000 employees according to the Department of Transportation Fiscal Year 2010 Budget Highlights.

The fiscal insanity does not stop with numbers of employees and their salaries. One also needs to factor in pension benefits that private sector employees do not receive.

Mike "Mish" Shedlock

Fri, 12/18/2009 - 13:10 | 168892 Gwynplaine (not verified)
Gwynplaine's picture

You make a lot of good points, but I don't see the 80's and 90's as a particular example of inflation.  Lots of commodity goods were gettting progressively cheaper and cheaper which was hard on farmers, miners, and basic materials.  The dollar was also appreciating versus world currencies.

I agree that the last two years have been deflationary, but the long term trend is for commodities to rise (priced in all currencies) and for the exchange value of the dollar to fall.

Fri, 12/18/2009 - 13:32 | 168931 cougar_w
cougar_w's picture

Don't confuse commodities with abstraction.

Commodities are part of the goods production+consumption spiral. Without consumption, commodities (and other forms of capacity) sit around and lose value. You can have commodities inflation while cheap money is chasing investment return and falling into old patterns, just as you can build factories you don't currently need, but that fairy tale only continues so long.

If the world cannot re-ignite consumer patterns, then the commodities market writ large becomes a black hole in the near term.


Fri, 12/18/2009 - 13:26 | 168918 cougar_w
cougar_w's picture

Today's "must read" ZH comment

Suggest this as a ZH parent post.

Sat, 12/19/2009 - 02:37 | 169722 MsCreant
MsCreant's picture

I agree. AN rocks.

Fri, 12/18/2009 - 18:20 | 169277 Bob
Bob's picture

The Great Depression is a poor comparison since the US dollar was backed by gold and the US was not the world's only superpower and the dollar was not the reserve currency.  This limited the options the US had.

Great understatement there.  Yet people like to ignore the modern system's complexity and multiplicity of leverage points.  This ponzi could run for quite a long time . . . infinitely, in theory (though not to be expected in an imperfect world, even one run by the best and brightest gangsters yet.) 

Fri, 12/18/2009 - 18:15 | 169278 Bob
Bob's picture


Fri, 12/18/2009 - 12:57 | 168858 ATG
ATG's picture

That would make usury the number one budget item...

Fri, 12/18/2009 - 09:04 | 168598 Anonymous
Anonymous's picture

Problem with step 4: it's trillions, not billions, of $ of debt that they need to issue.

Fri, 12/18/2009 - 12:38 | 168815 ATG
ATG's picture

Except 30 year bond rates and oil rising from

2.519% and 35.13 after government lost all moral

compass and authority.

Fact is, most Treasury debt has to be rolled over

at higher rates in the coming year. Uncle borrowed

short and faces $106 T in unfunded liabilities.

It may be every robo trader for herself before too

long, as it was in the American Revolution.

The return of self-reliance as the market game folds...




Fri, 12/18/2009 - 13:29 | 168924 AnonymousMonetarist
AnonymousMonetarist's picture

Truth that...until they are gangbangin' a string.

Fri, 12/18/2009 - 14:47 | 169054 trav777
trav777's picture

yeah if you mean float it in short maturity bills.

Look at the distribution curve for amount versus duration on will scare you.

We are a bad auction away from true monetization needs.

without the support of China's export ponzi and oil (we're consuming less and Peak has passed), there is less for the gov't needs for recycle.

Thu, 12/17/2009 - 23:16 | 168377 phaesed
phaesed's picture

Welcome to the Hicksian IS-LM liquidity "trap" (although this trap was intended from the start). Treasuries are the trade nobody wanted and it's the trade that's about to blow apart hedges with the mamajama of short covering rallies in the TLT.

When you "sell" (or short) a treasury, for all intensive purposes, you're promising to deliver cash in a certain time frame.

That's pretty hard to do with a shortage of dollars.

*yawn* The bubble in treasuries, lol, the bubble was out of Treasuries. I'm sure I'll hear all year long about shorting treasuries again next year.  Gotta love when you can marry technical analysis to economic theorizing.


Fri, 12/18/2009 - 04:46 | 168551 Reductio ad Absurdum
Reductio ad Absurdum's picture

Nice eggcorn there. Correct phrase is "for all intents and purposes" (see

Sat, 12/19/2009 - 15:26 | 169984 Anonymous
Anonymous's picture

I once told a wave, "Gee, you're swell"

Thu, 12/17/2009 - 23:18 | 168382 P Kennedy
P Kennedy's picture

I'm only having trouble with two parts of the logic here: 1) does the net deficit equal net supply of dollars, or does the level of imports represent the actual supply( and of course, to whom) and 2) assuming a shortage, how is anyone going to get enough dollars should the Chinese want even partially out of their dollar based assets?

What is the sound of one hand clapping?

Thu, 12/17/2009 - 23:24 | 168390 P Kennedy
P Kennedy's picture

Argh, I gapped! I neglected to get ask the over /under on QE2. June?

Thu, 12/17/2009 - 23:26 | 168392 Anonymous
Anonymous's picture


Fri, 12/18/2009 - 13:31 | 168927 AnonymousMonetarist
AnonymousMonetarist's picture

The sound of one HAND hamping.

Thu, 12/17/2009 - 23:27 | 168395 deadhead
deadhead's picture

probably earlier than June. 

in fact, with our polling data going south as it is, probably february.


Thu, 12/17/2009 - 23:31 | 168400 Jesse
Jesse's picture


Is that William Hung wearing glasses?

Thu, 12/17/2009 - 23:35 | 168404 deadhead
deadhead's picture

From B'berg:

"Dec. 18 (Bloomberg) -- Chinese banks’ capital strength is likely to be more “strained” than it appears as lenders increasingly use off-balance sheet transactions to free up room for further loan growth, Fitch Ratings said.

The growing amount of unreported loan transactions, including re-packaging loans into wealth management products to sell to investors and the outright sale of loans to other financial institutions, represent a “growing pool of hidden credit risk” and may lead to downward revisions for some China banks in 2010 and 2011, Fitch said in its latest report. "

The Chinese learned well from Lehman, Bear, Goldman and JPM I see.  Start stuffing their shit into QSPE/SIV death holes and unload them to investors (beware pig farmers, talk to those villagers in Norway) and other banks.

What could go wrong?

Fri, 12/18/2009 - 11:04 | 168670 MsCreant
MsCreant's picture


Went on a rant. I have been trying to articulate something for a while, and I may not have said it well, but this is a start. Your news story put it up in my face.

We are all Ponzi schemers now. I think this should be the starting position of everyone's theorizing about global economic systems. Exploit everyone's faith in the system to use fiat to grab as much stuff as possible before the rest catch on. Right now some folks are catching on and instead of crying foul, they are joining in the grabbing, knowing there is still a little time to get away with it.

I keep wondering if inflation/deflation is a artifical dichotomy that has us trapped in the way we are thinking about this. In a sense, what we call hyperinflation really isn't inflation at all, it is a "fail." The work you put in to get the fiat, the value is not held by the fiat because people don't believe in the system backing the fiat. Printing is an attempt to get something for nothing.

If the currency is being debased, is there a way to look at it that "assets" things that are also supposed to represent "stored labor" are not being deflated so much as they too are being "debased?"

I am open to it that my thinking is fucked up, but I'm going to keep typing. We print too many dollars. We build too many houses and skyscrapers. We are creating too many cars (one theory would have it we should not need a new one every few years, they can be built to last many, many, years).

Granted, work went into the building of these things. But basic Marxian thinking informs us that just because a thing is created does not necessarily make it a commodity. To be a commodity it has to have both a use value and an exchange value.

Now I am going to add in the kicker-- oil/fossil fuels. It has multiplied or if you like "artificially inflated" the store of value. If all of us had to build a house without fossil fuel, the "work" stored in that house would be huge. Many of us working many hours. Fossil fuel removes the work hours. Do you see what I mean by "debasement?" Are they being exchanged as if the real people hours were in them? Or the inflated fossil fuel "work hours?" Fossil fuel distorts getting a read on the real use value of the commodity in this situation, it seems to me.

Maybe what I should say is that it seems to me that fossil fuel is some kind of an equivalent of a printing press gone mad. Fossil fuel has created all the imbalance we see around us. Fossil fuel has "debased" the intrinsic value of a house and other things we think of as stored value.

Fri, 12/18/2009 - 12:42 | 168824 Anonymous
Anonymous's picture

"Granted, work went into the building of these things. But basic Marxian thinking informs us that just because a thing is created does not necessarily make it a commodity. To be a commodity it has to have both a use value and an exchange value."

This is the primary reason why Gold is strictly a speculative play at this time. It has no functional value.

Fri, 12/18/2009 - 13:51 | 168955 faustian bargain
faustian bargain's picture

No, that is the reason why gold is considered a type of currency, not a simple commodity.

Although if one felt the need to consider it a commodity, you could say that its 'function' is to store value or purchasing power. That is how it is primarily used, and it works well.

Fri, 12/18/2009 - 14:29 | 169018 Hephasteus
Hephasteus's picture

GOLD CAN NOT. WILL NOT. EVER BE A COMMODITY. It fails the basic principles of a commodity. It's NOT CONSUMABLE. It's so "NOBLE" in the periodic table that anything you can mix it with you can soo freaking easily unmix it and refine it that it's nearly ludicrous. The banks trying to pretend it's a commodity is an agregious violation of all the natural categorization laws of the human psyche.

Fri, 12/18/2009 - 18:42 | 169303 Bob
Bob's picture

+10.  Nothing more than bloodily ancient bling that, if people call bullshit, is worth relatively little. 

Fri, 12/18/2009 - 14:49 | 169058 trav777
trav777's picture

gold requires work to mine.

it has value in that you can trade it for pussy

Fri, 12/18/2009 - 17:08 | 169216 Anonymous
Anonymous's picture

ah, that ultimate epitome of any value trading system : "can i trade it for pussy?". Touché

Fri, 12/18/2009 - 17:23 | 169225 Rainman
Rainman's picture

Trade with diamonds. Hoard the gold.

Fri, 12/18/2009 - 12:45 | 168829 ATG
ATG's picture

Only government monopoly capitalists can take

things with 100 or 1000 years of supply and

make prices go up by inventing global warming

(domestic nat gas and coal.)

Ponzi schemers play musical chairs at their

risk. For Uncle, BB, CR, LS, Timmay and Pelosi

Reid Rahm-BH0, the music has stopped...

Fri, 12/18/2009 - 14:03 | 168982 cougar_w
cougar_w's picture

You are getting close.

Fossil fuel can be thought of as two different things, and how you project it effects how it changes things:

1) Fossil fuel is free sunlight.

2) Fossil fuel is free (slave) labor.

Re #1: If it is free sunlight then you just increased all the things the sun can do for you, including how many days you can fit into a single year, and how much food you can grow in a square foot of soil. You probably quadrupled both of these. Electric lighting, space heating, fertilizers for food production, pumping water. These are all proxies for the usual activity of the sun. The "fossil sunlight" contained in coal, oil and natural gas give us more daylight, warmer conditions, and move water for us.

RE #2: You can convert the energy in fossil fuels into work (as defined in classical physics) and that work can amplify human productivity. You can also amplify your personal productivity by holding slaves, and this remains popular around the world, but you CANNOT increase total human productivity by holding select humans captive. No, you need something not human to bring to bear. We used not-human animals in the past, but they only produce limited gains in total productivity and since they are living things technically are part of our productivity pool from the start (ie we have to feed them from their own surplus production). However fossil fuels used in conjunction with engines that turn their contained energy into useful motion (and the work implied therein) are an ENTIRELY EXTERNAL SLAVE POOL that raises total absolute human productivity; engines of all kinds are every one's willing slave.

Without fossil fuels our days are fewer and shorter. Without fossil fuels our labor pool is vastly (by orders of magnitude) reduced due to the loss of all those engines. These are different effects and will show up in the economy in different places, but they are complimentary.

It has been said that the last 200 years of economic growth were simply the conversion of free sunlight into money. We can see how that might happen. But when those extra days in the year are withdrawn, and those slave workers fall still and silent, where will our wealth come from? Where will it go?

BTW, we can create extra/longer days via alternative power, collecting sunlight and wind energy during the day then using it at night or using it during the day to amplify human effort. But the utility of alternative power even on a massive scale remain minuscule next to fossil fuels. Do not underestimate the power contained in a single barrel of oil. It is simply off the charts. We would probably need to consume all our remaining oil and a lot of the coal to just create a large enough alternative power base to maintain current energy consumption patterns, and this is not going to happen. This is one of the reasons that the peak-oil and AGW movements are freaking out; we've probably missed the boat.


Fri, 12/18/2009 - 16:50 | 169189 Sun Tsu
Sun Tsu's picture


Western technology and protective alliances with the Middle East powers have enabled a quantum leap in prosperity since the 1950s. Paul Ehrlich had graciously predicted a Malthusian apocalypse in the 1970s, in spite of the obvious, the human species have adapted with increased productivity and the real economy thrived. No world wars, increasing global cooperation, banking, entrepreneurs leading technology innovation in every field, the green agricultural revolution, and a continuous stream of more energy supply and more efficient use made practical. GDP growth is highly correlated with the growth in steady and fair-valued energy use, and not with artifically contrived climate models. Private enterprise spent 50 years preparing for Peak-oil before Paul Ehrlich and Al Gore adopted peak-oil for use as a political lever.

Leave it to the Goldmanites, movie stars, President Obama's Administration, and the 2008-2010 elections to rush a climate treaty "potlatch", and screw the pooch....  May they all live in interesting times.

Fri, 12/18/2009 - 11:40 | 168707 Anonymous
Anonymous's picture

Well every now and then China finds someone to face the executioner. But keeping two sets of books is a great way to do business, just ask any fraudster out there.

Thu, 12/17/2009 - 23:38 | 168410 Anonymous
Anonymous's picture

I've been harping on that for a while and would have taken a long position with the ole buck,if it wasn't for the fed. The account deficit has shrunk by almost 50%,so there is no need for the dollar to be at 2008 level. But now with the chairman passing the first test in the house,who knows whatt kind of scheme he is going to come up with GS and company to drive the dollar down again?

Fri, 12/18/2009 - 12:47 | 168834 ATG
ATG's picture

Do not fear the Fed.

It cannot push on a string.

And GS has net its waterlooo.

Only fools want more debt...

Thu, 12/17/2009 - 23:39 | 168412 Sancho Panza
Sancho Panza's picture

Excellent post.

From Mises' The Causes of the Economic Crisis, "By acting in unison, banks [among nations] could extend more circulation credit than they do now, without any fear that the consequences would lead to a situation which produces an external drain of funds form the money market.  To be sure, if this concern with the situation [threat] from abroad is eliminated, the banks are still not always in a position to reduce the money rate of interest below its "natural" rate in the long run.  However, the difference between the two interest rates can be maintained longer, so that the inevitable result - malinvestment of capital - appears on a larger scale.  This must then intensify the unavoidable crisis and deepen the depression."

Looks like we're headed for a global depression.

Fri, 12/18/2009 - 12:52 | 168846 ATG
ATG's picture

We have 2.2 T dollars and what's left of a $13 T

GDP. Where's purchasing price parity?

Well north of 121 methinks. Now the giant

sucking sound working FOR the USA after

decades of New World Order scaffolding

collapses. Pity the architects...


Thu, 12/17/2009 - 23:41 | 168415 Anonymous
Anonymous's picture it is....

Time to downsize the US govt by 30% to 50%....

This is a force majure....

Cannot lose....

What one does not have....

Fri, 12/18/2009 - 07:25 | 168566 Anton LaVey
Anton LaVey's picture

It's spelled "force majeure".

Good luck downsizing the US gov.

Fri, 12/18/2009 - 13:02 | 168871 ATG
ATG's picture

Tax revenues fell -35% last April 15.

The Beast is starving and the Fed and Treasury

know they cannot finesse its way out.

Looking for cascading government defaults from

county to state to Fed to UN level...

Thu, 12/17/2009 - 23:47 | 168419 MikeNYC
MikeNYC's picture

Oh, I know: We just print up some dollars and give them some, which they use to buy our Treasuries.

This central banking stuff ain't so hard.


Fri, 12/18/2009 - 00:03 | 168432 Daedal
Daedal's picture

Obviously you've never printed dollars with one hand while shaving your beard with laser-like precision with the other. Not so easy now, is it?! And by 'printing dollars' I of course mean giving a reach around to Ken Lewis.

Fri, 12/18/2009 - 01:01 | 168479 i.knoknot
i.knoknot's picture

and what if we 'give' them dollars via backdoor market information, e.g. we'll "let" gold rise until date_1, you sell, we'll let it drop for a buy-back date_2, you buy... no receipts, no tracking, just happy gub-mints/central banks...

not that far out if you think about the agendas and levers that are out there...

based on ZH reading, we can move the markets any way we want for short periods of time... changes your sense of the game a bit if you look at it that way.

Fri, 12/18/2009 - 11:09 | 168678 MsCreant
MsCreant's picture

I have wondered this myself. I could even see doing the backdoor information thing as a way to cool them out after you have ripped them off "Let us make it up to you by doing X untill XX/XX/09, then we will do Y, to save our own ass, but you pull out before we do Y so you won't get hurt the next time we go to rip everyone off."

Fri, 12/18/2009 - 14:09 | 168990 cougar_w
cougar_w's picture

What if?

It's pretty clear they've been doing exactly that for a while. What is probably happening now is, the greedy are taking their spoils and letting the "beautiful machine" fall apart.

Fri, 12/18/2009 - 01:13 | 168490 dark pools of soros
dark pools of soros's picture

hell the Fed is probably the worlds biggest counterfeiter of the $$

Fri, 12/18/2009 - 10:51 | 168659 Anonymous
Anonymous's picture

So now do you still believe the billions of US Treasuries confiscated by Italian police from Japanese at the Swiss border (twice) were counterfeit?

Fri, 12/18/2009 - 13:04 | 168877 ATG
ATG's picture


Fri, 12/18/2009 - 00:07 | 168435 Anonymous
Anonymous's picture

If the Treasury (deficit) spends for real goods and services or salaries, new reserve balances are created.


Either way the bonds get sold! Guaranteed! It's not economics it is simple accounting.

Fri, 12/18/2009 - 13:06 | 168882 ATG
ATG's picture

What reserves?

Defaults far exceed money creation and TARP as

Rosie, Meredith Whitney et al pointed out...

Fri, 12/18/2009 - 00:12 | 168439 fiasco
fiasco's picture

when the jobs went overseas to the barbaric world, the economists say the new paradigm is the platform economy.

we invent and the barbarians make the stuff with lead and poison.

platform economy, nasdaq at 5000, strong dollar policy, and what else?

when you look at the past, you say to yourself how somebody can believe such stupid things, like god, like the soul, like resurrection, like intelligent design, and like the ending to the sopranos.

but now it's like the stupid past is here happening before our eyes.

i'm a gonna take my ashes to the mountain after i bang francesca down the street.




Fri, 12/18/2009 - 00:40 | 168461 lsbumblebee
lsbumblebee's picture

You read Henry Miller don't you?

Fri, 12/18/2009 - 01:05 | 168483 fiasco
fiasco's picture


the last book i read was when i was a bambino.  it was dostoyevsky idiot.

i had this experience,  i was reading the book when the neighborhood boys come along and saya

hey, look the idiot read the idiot.

this had an affect because reading is actually something stupido like playing cards is stupido for schopenhauer

now i just read the internet



Fri, 12/18/2009 - 01:25 | 168494 lsbumblebee
lsbumblebee's picture

Well at least you're reading something. Mosta people lika you...shit you got me doin it. Most people just watch teevee.

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