This page has been archived and commenting is disabled.

The ECB Blasts Governmental Fear-Based Racketeering, Questions Keynesianism, Believes The Fed's Powers Are Overestimated

Tyler Durden's picture


In what could one day be seen by historians as a seminal speech presented before the Paul Volcker-chaired Group of Thirty's 63rd Plenary Session in Rabat, the ECB's Lorenzo Bini Smaghi had two messages: a prosaic, and very much expected one: of unity and cohesion, if at least in perception if not in deed, as well as an extremely unexpected one, in which the first notable discords at the very peak of the power echelons, are finally starting to leak into the public domain. It is in the latter part that Bini Smaghi takes on a very aggressive stance against not only the so-called "inflation tax", or the purported ability of central bankers to inflate their way out of any problem, but also slams the recently prevalent phenomenon of fear-mongering by the banking and political elite, which has become the goto strategy over the past two years whenever the banking class has needed to pass a policy over popular discontent. The ECB member takes a direct stab at the Fed's perceived monetary policy inflexibility and US fiscal imprudence, and implicitly observes that while the market is focusing on Europe due to its monetary policy quandary, it should be far more obsessed with the US. Bini Smaghi also fires a warning shot that ongoing divergence between the ECB and Germany will not be tolerated. Most notably, a member of a central bank makes it very clear that he is no longer a devout believer in that fundamental, and false, central banking religion - Keynesianism.

First, a quick read through the "prosaic" sections of Bini Smaghi's letter.

Bini Smaghi, who is a member of the executive board of the ECB, has a primary obligation to defend the ECB's public image in this time of weakness and complete lack of credibility. And so he does. When discussing the ECB's response to the Greek fiasco and contagion, he is steadfast that the response, although delayed and volatile, was the right one. Furthermore, he claims that the hard path Europe has set on is the right one, as it will ultimately right all the fiscal wrongs, even without the benefit of individual monetary intervention. Ultimately, the ECB is convinced that not letting Greece fail, either in the form of union expulsion or partial default, was the right decision, as "this sill force euro area countries to address their fiscal positions earlier. It’s not easy. But it will be done, because it can be done and it has to be done in any case. And, last but not least, because there are no alternatives." Alas, while we agree that admission is the first step on the road to recovery, the subsequent steps will prove to be insufficient. The imbalances in Europe are of such great magnitude that hoping that countries eventually grow into their balance sheets by way of austerity is simply a ridiculous assumption, and as such does not merit extended overviews. We note this with irony, because apparently the ECB, contrary to elementary school rule #1, favors quantity over quality. As the ECB board member says:

Let me consider the arguments put forward by those who regard a Greek default as unavoidable.

Their first argument is economic. The adjustment programme is too harsh, given the level of the debt-to-GDP ratio reached in Greece. It will produce a debt spiral which will lead the country into a recession and deflation. The problem is made worse by the loss of competitiveness suffered by Greece over the last decade and the impossibility of devaluing the currency. Their reasoning is generally no more sophisticated than that. Some analysts have put together a few numbers to show that they are aware of the problem. But I have not seen a serious analysis of the 120-page report produced by the IMF which looks at the various aspects of the programme, including the impact of the structural measures on growth, the sustainability analysis or other features of the programme. Not one review of the realism of the assessments made by the staff of the IMF and the Commission. In fact, I suspect most market analysts have not even looked at the adjustment path for the primary surplus which is embedded in the programme, which aims to reach 6% of GDP in 2015, a level no different from the ones that other countries in the past have implemented to consolidate their public finances. It’s a level that a number of other countries – including some outside the euro area – will have to achieve if they want to stabilise their debt. Most market analysts and other observers have probably not even looked at the structural measures that are embedded in the programme, affecting for instance the labour market, or at several liberalisations, and their impact on economic growth. The inefficiencies in the tax collection system, which have been aggravated before the elections, have also been overlooked. The perception that the Greek programme will not work looks more like an assumption than the result of a serious assessment.

To summarise, I wonder which analysis is more serious and credible: the many one-pagers, very well publicised – I must admit – which probably aim to influence the rest of the market; or the IMF’s 120 pages of rather tedious analysis describing the contents of the programme, together with its risks.

To this we ask: if a collective brain trust is charged with the goal seeked, and well compensated by taxpayers, duty to put together a 1,200 page report that confirm the primary tenets of the trust itself, will Mr. Smaghi give it 10 times the credibility of the ECB's report? Or how about one million typewriter-armed monkeys putting together 1,200,000 page "analyses" claiming that the Greek default is inevitable? We hope someone has the facilities to conduct just such an experiment. Perhaps the futility of such a simplistic act is the very reason why not more than a one-pagers is required to refute the central bank dogma.

Thus the key axis of contradiction emerges: the ECB is willing to set off on the "demonstratedly" arduous journey of forcing its member states to right their fiscal (income statement) evils, yet while not acknowledging that the key missing link, balance sheet restructuring, is not necessary but critical. There is a reason why plain vanilla restructurings focus on the balance sheet, and not on the income statement: a company with a fresh start balance sheet can grow its income statement without its debts being a hindrance, on the other hand, rarely if ever, do income statements allow companies to grow into untenable balance sheets. This is the main flaw in the ECB's plan. And it is these very contradictions that force the European populace to lose its credibility in the ECB, a concern which even the central bank is all too aware of.

The balance of the "prosaic" part of the speech is along the same lines: merely a defense of the ECB's line of actions, driven primarily by a direct response to the market, and thus a very short-sighted and reactive, instead of proactive, policy response, which merely invites the market to test out the ECB's lack of resolve. And once again, the ECB is not naive and is fully aware of this, yet it redirects attention to other source of "market-test" weakness: "Financial markets are testing each country, one by one, to see whether they are willing to adopt the necessary budgetary measures, starting with those which seem to be facing the greatest hurdles to consolidation." Bini Smaghi is right and wrong here: the market will continue testing country by country, but not to determine fiscal resolve, only to take advantage of the lack a monetary one. And so from crisis to crisis, the market will continue reaching deeper until it finally tests the very core of the eurozone: Germany.

And speaking of Germany, this brings us to the other part of Bini Smaghi's letter. In one of the first open shots of public confrontation, we see that the ECB has been very much displeased not only by rampant fear-mongering, but by the words of Germany's Angela Merkel, whose recent repeat declarations that Greece could be allowed to leave the union, have undermined the bedrock of the ECB. Furthermore, as the WSJ reports, "in a rare show of defiance for the consensus-driven ECB, Germany's
central bank head Axel Weber told the German newspaper Börsen-Zeitung
that he viewed the bond-buying decision "critically" and that it
carried "substantial stability risks." Is this the type of rancorous infighting between Europe's two main powers, that will seal the fate of the Eurozone experiment far more certainly than parliamentary stormings in Athens?

We read in Bini Smaghi's letter the first fingerpointing of displeasure by an ECB official aimed squarely at Germany:

A further dimension, in the European context, is the difference in cultures and sensitivities. They affect how issues are communicated within countries, in particular between politicians and their electorates. These are differences which totally disconcert financial markets. For instance, in one large euro area country it was thought that public support for swift action could be achieved only by dramatising the situation, for instance, by telling the public that “the euro is in danger” or by considering the possibility of expelling a country from the euro area. But it was not realised that, in the midst of a financial upheaval, such words are like fanning the flames and that the cost of the support package could only increase following such dramatic declarations. By contrast, in other countries, leaders want to be seen as being in control of the situation and taking all sorts of initiatives to reassure their electorates. The media, of course, have a field day reporting on such apparently inconsistent activities.

We hope that the ECB's displeasure by the kind of racketeering that Americans have grown to know and loathe, as it is performed either openly by politicians who directly threaten with end of the world scenarios every time they wish to get their way, or indirectly, such as when the market crashes a 1,000 points when it appears that the Fed is on the verge of losing its secrecy, is espoused by more individuals and organizations. On the other hand, we will closely follow the now open feud between German and Europe's Central Bank - if past experience is any indication, infighting between these two will only lead to mutual weakening, and result in an even faster forced reorganization of peripheral European countries, and, eventually the euro.

In this regard, perhaps Bini Smaghi's speech created far more damage than damage control: now that the public's, and more importantly, the market's, attention is be drawn to the duel between Germany and the ECB, this will merely destabilize the monetary union even more, now that monetary and political unions, and conflicts, are synonymous, a point not lost on the ECB executive himself: "As I said earlier, monetary union is de facto a political union."

And now that European monetary "politics" are the center stage, we find two other pearls in Bini Smaghi's speech.

Not too surprisingly, the ECB is now directly pointing a finger at the Fed, where conventional wisdom has long held the belief that due to its ability to determine independent monetary policy, backed by the world's reserve currency, the Fed can and always will easily inflate its way out of any complication.

To believe that an inflation tax can solve the problem posed by the mounting public debt is an illusion that some people like to cultivate. For several reasons. First, people are less naïve than some might think – they dislike an inflation tax as much as other forms of fiscal adjustment. Second, it’s not so easy to generate inflation, in particular ‘surprise’ inflation, without provoking a more-than-proportional increase in interest rates, also in light of the short average maturity of public debt in most countries. Third, a rise in inflation, and inflation expectations, would produce a major upward shift in the yield curve, inflicting major losses on the banks and financial institutions which have been heavily investing in these markets, potentially undermining the recovery.

This is probably the best encapsulation of the threats, or rather threat, that another QE episode by the Fed will bring with it. In essence the ECB is saying that should the Fed pursue another QE episode, the imminent explosion in short-end interest rates will lead to a solvency crisis within the US itself, monetary policy or not. Bini Smaghi points out one very critical truth: in not having a reserve currency, and thus protected by the belief that the ECB can inflate its way out of complication, it is forced to pursue fiscal reform, much sooner than the US will, which will only result in a much greater crisis in the US, once it becomes clear that the marginal influence of monetary policy will be drowned out by a sea of fiscal imprudence. And for the one true shining example of the latter, look no further than the CBO's 10 year budget deficit estimates.

In short, the impossibility of resorting to an inflation tax is forcing euro area countries to tackle the burden of public debt sooner rather than later. In other countries the illusion of being able to resort to the inflation tax might delay the adjustment, but the longer the treatment is postponed the harsher it’s likely to be. End of digression.

Was this the first shot across the bow in the the transatlantic central bank wars? Too bad the ECB will be insolvent overnight if the Fed decides to truly escalate and pull all its swap lines tomorrow. Why risk retaliation? This is easily the most important question needing answering over the next several weeks.

Last, but not least, are the following zingers that have no other intent than to poke at the ever larger holes appearing in the fabric of that one modern false economic religion known as Keynesianism.

In the aftermath of the Lehman failure, governments around the world seemed to rediscover Keynes. They injected huge amounts of borrowed money – public funds – to stabilise the economy after the shock of the Lehman failure. These policies worked, and averted a global depression. The success of those policies has led governments – encouraged by international organisations – to continue using expansionary fiscal policies to try pulling the economy out of the recession and getting it back to the pre-crisis level.

The strategy is based on a model which may turn out to be inappropriate in the current conjuncture. Let me discuss some of the underlying assumptions of the model. First, the initial fiscal impulse was successful in avoiding a depression because it helped to coordinate agents’ expectations, in the Keynesian or Knightian way of reducing uncertainty, thereby avoiding a vicious circle of recession and deflation. The direct impact on domestic demand may have been more modest, as shown in countries where the size of the fiscal stimulus was more contained but nevertheless fared equally well. Second, potential growth might have been severely affected by the crisis. As a result, the pre-crisis level of output, achieved in a bubble economy, would not represent a sustainable objective over the policy-relevant horizon. Third, the level achieved by the public debt in many countries may have impaired the effectiveness of further expansionary fiscal policy.

To sum up, while the fiscal expansion was successful immediately after the Lehman crisis, it may not be sustainable over time and may have to be corrected rapidly. Financial markets seem to be giving increasing attention to this hypothesis. And they have started to test it.

Is this the last degree of "religious" doubt before outright revulsion set in and the oligarchic heretics emerge? More so than the question of whether or not the euro is viable, is whether the beginning of the end for Keynesianism is approaching? If so, the imminent revolution in Western world economic thought will be unprecedented, and the resulting global reset will lead to a world where daily news will no longer be dominated by headlines about more record banker theft going unpunished, co-opted and facilitated by a cheaply purchased legislative, executive and judicial system.

Link to full speech by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB at “The Group of Thirty”, 63rd Plenary Session, Session I: The Crisis of the Eurosystem, Rabat, 28 May 2010


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 05/29/2010 - 17:08 | 381388 lynnybee
lynnybee's picture

this article is exactly why i love this website ........ i learn so much & really appreciate Tyler's efforts.    sincerely .....

Sat, 05/29/2010 - 17:28 | 381412 hound dog vigilante
hound dog vigilante's picture


ZH is a template that will multiply... smart, nimble SMEs driving web-based journalism (and dialogue).

If broadsheet press is dying, then ZH is both executioner and mid-wife to the next generation...  long live ZH.


Sat, 05/29/2010 - 19:01 | 381516 Postal
Postal's picture

Hail Tyler! Long live ZH! *raises goblet of wine in toast*

Sat, 05/29/2010 - 23:45 | 381823 ThreeTrees
ThreeTrees's picture

Agreed.  Crowdsourced media:  The Market at Work.

Sat, 05/29/2010 - 23:53 | 381827 trav7777
trav7777's picture

TOD was really among the first of this breed

Sun, 05/30/2010 - 04:56 | 381980 AnAnonymous
AnAnonymous's picture

What did you learn? That the Euro has not the same properties as the USD, that the missing properties matter, that the Euro doesnt allow to do what you can do with the USD and that the Europeans resent?


It is hoped this is not this. Because it is not news.

Sun, 05/30/2010 - 08:04 | 382032 Trichy
Trichy's picture

No, what you learn from this great article is that however close europe is getting to the Ben way, applauded by the Frogs and the Meds, there are still some responsible Europeans left. The Germans are going to resist Keynes, which supports my view that it will be them walking out of the Euro disaster. It will take more clout than Sarkozy, Berlusconi and Mr. Bean of Spain have to bully the German population into bailing out the trash.

The only reason the Germans have gone along, so far, has been their weak banks overlevered with the periferis junk bonds. They will soon recognize that it is cheaper to redirect these bail outs directly to their own banks instead doing the detour through the corrupt states.

My bet is that the next time Sarkozy punches his fist into the table on behalf of his Keynsian gang, both the ECB and Merkel will call his bluff. That could well start the fun.

(Reflection: Ever wonder why there were so many zeros on Mediteranean bills

1 Merkel= 100 Drachma= 100 Mr Bean Pesetas 1= 1000 Lira = Keynes)


Thx Tyler, great piece.

Sun, 05/30/2010 - 09:06 | 382064 AnAnonymous
AnAnonymous's picture

Where does your appreciation of who is a Keynsian and who is not come from?

Europe is trying to mimick the US. But they work with the Euro, not with the USD.

That is why they will never achieve the same results as the US.

Sun, 05/30/2010 - 09:21 | 382070 Trichy
Trichy's picture

Agree, they will never achieve the same result as the US, thank god, and that is just because Gemany won't let them. If it was up to the French, Spanish etc. they would already have US like deficits, bailouts et al in all of Europe. The current bailout has back doors as previously reported here at ZH, and was only partially agreed to by Merkel after Sarkozy bluffed by threatening to leave the Euro, lol.

Sun, 05/30/2010 - 09:27 | 382074 AnAnonymous
AnAnonymous's picture

Clearly, the results achieved by the US are ugly. That is why the EU is trying to mimick the US by the way.

Sun, 05/30/2010 - 14:44 | 382412 Trichy
Trichy's picture

Sorry for insisting, but I interpreted your first post to imply, "move on no news here", which I disagree with. For the Euromarket as well as international it is extremely important to follow the mood of the ECB and the EU sovereigns and this was a big move from ECB. When you say EU is trying to mimick the US I again disagree cus you imply EU is reigned by the frogs. They had a win in getting the bail out through but the French have never won a war. (If you need to verify the later fact google "french war victories" and go for the I'm feeling lucky button.)

Sun, 05/30/2010 - 15:46 | 382471 AnAnonymous
AnAnonymous's picture

That is that. Move on, no news. The Euro has not the same properties as the USD. Therefore the ECB cannot accomplish what the FED can accomplish.

Sun, 05/30/2010 - 13:31 | 382326 sgt_doom
sgt_doom's picture

"..they will never achieve the same result as the US.."

I believe the reason for that is because JPMorgan Chase, Goldman Sachs & Morgan Stanley have control of the single largest concentration of credit derivatives (mark-to-myth, of course).


Sun, 05/30/2010 - 15:35 | 382463 Ropingdown
Ropingdown's picture

Agree, Trichy: Merkel's quick independent implementation of various short-sale restrictions seemed to me the stage-setting for a move to rescue German banks directly, as the leadership saw the French trying to lock-in an absurd concept of "no restructuring, no defaults, no withdrawals."  Smaghi is desparate. The French "gang of three" have gone delusional. What will happen is still obscure.  The heart of industrial and engineering Europe is still either not in the Euro zone or willing to follow Germany, one would guess.

Sun, 05/30/2010 - 15:06 | 382432 Kayman
Kayman's picture

Ahhh AnAnon y mouse

Squeak louder, I cannot hear you.  Must be my racist ears.

Since you already know everything, why not move to China, set up your own site and wait for the knock on the door.

Sun, 05/30/2010 - 15:49 | 382473 AnAnonymous
AnAnonymous's picture

You have a strange definition of knowing everything.

Sun, 05/30/2010 - 10:44 | 382138 ISEEIT
ISEEIT's picture

I adore this site. Shit on the fucking liars and I'll help do it. I need a hand though: Would love to have someone explain to me what "Liberty 33" is?

Tyler makes reference to that entity and my stupidness is unfamiliar with it.

Like the Angel said "Pleeese heeelp".

Sun, 05/30/2010 - 11:15 | 382173 mikla
mikla's picture

Liberty 33 is a reference to the Federal Reserve Bank of New York, (at 33 Liberty Street, downtown Manhatton, New York City, New York, USA) through which "the Fed" handles most of its market operations.

Sun, 05/30/2010 - 15:19 | 382446 Kayman
Kayman's picture



I don't know who junked you and why, but you have asked a fair question and you have been given the answer.

I think most ZH'rs are happy to provide answers where they can, and I am certain most ZH'rs will confess they do not have the answers to every question.

That is, except for AnAnon y mouse, who while he/she/it already knows everything and disdains this site, still has the temerity to come on to this site and bother us with his tedious bleatings.

Mon, 05/31/2010 - 10:23 | 383485 ISEEIT
ISEEIT's picture

Thank you all. I am now somewhat less stupid. Honestly, I appreciate it.

Mon, 05/31/2010 - 05:07 | 383276 Fíréan
Fíréan's picture

@ ISEEIT. ".... and my stupidness is unfamiliar with it."

Don't be hard on yourself.You are in good company here and probably know more than the majority,yet  not all, who post replies. I wonder how many have read the 120 page analysis refered to in the leading article here ? ! ? Maybe Zero Hedge  are conducting their own experiment of  multiples of typewriter-armed monkeys ?





Mon, 05/31/2010 - 05:07 | 383277 Fíréan
Fíréan's picture

@ ISEEIT. ".... and my stupidness is unfamiliar with it."

Don't be hard on yourself.You are in good company here and probably know more than the majority,yet  not all, who post replies. I wonder how many have read the 120 page analysis refered to in the leading article here ? ! ? Maybe Zero Hedge  are conducting their own experiment of  multiples of typewriter-armed monkeys ?





Sat, 05/29/2010 - 17:11 | 381391 exportbank
exportbank's picture

I've asked this question on ZH previously but never received an answer:

Why is there a target inflation rate and why is it never 0%?

Why do governments target a 3% deficit and think they're doing well - why don't they target a 0% deficit or even better a 5% surplus to pay down debt?

Sat, 05/29/2010 - 17:17 | 381397 akak
akak's picture

I have been asking that very same question since I was a kid --- with never a logical or honest answer to it yet.

Sat, 05/29/2010 - 18:45 | 381493 mikla
mikla's picture

I've asked this question on ZH previously but never received an answer:


Why do governments target a 3% deficit and think they're doing well - why don't they target a 0% deficit or even better a 5% surplus to pay down debt?


Why is there a target inflation rate and why is it never 0%?

There are (at least) three good answers:

  1. Inflation is a tax.  By forcing inflation, governments get to spend "new" money that they did not have before (because it did not exist).  Governments don't need to explicitly tax its citizens for this money -- they simply print it (so it is politically advantageous).  With a target rate of 0%, governments would not get "new free money".  Further, society doesn't "feel" the inflated effects of the new money (currency devaluation) until later, so governments get to spend "stronger" money before the citizens play with it (at which point it becomes "weaker" money).
  2. Inflation devalues current debt.  Since nearly all governments are in debt, it is advantageous to governments to "de-value" what they owe by debasing the currency.  Deflation kills debtors, including governments.  Hello Iceland, Greece, etc.
  3. Inflation forces transactions.  Since you are "punished" for holding currency (you are punished at the rate of inflation), more transactions occur because people are accustomed to "getting rid" of a devaluing currency.  This increases the velocity of money, encourages excise taxes, and otherwise promotes economic activity (which benefits the government through increased property valuations and a HOST of other taxes).
In theory, economists are so afraid of "deflation" (where economic activity is punished) that they don't want to go anywhere near 0% inflation.  This is the famous "deflation spiral".  To encourage a "safe" margin from deflation, they shoot for 3%.  If you go too high, then it's similarly possible to destabilize economic activity (e.g., capital access becomes risky at greater interest rates, which similarly punishes economic activity).
I have been asking that very same question since I was a kid --- with never a logical or honest answer to it yet.
IMHO the central planners would rather you not understand such things (they benefit most with a compliant citizenry). There are more "nuanced" answers regarding positive-and-negative inflation rates, but then we start to touch into the "business cycle", which the central planners absolutely do NOT want you to discuss.
Sat, 05/29/2010 - 18:52 | 381506 mikla
mikla's picture

...sorry, I missed the other half of your question:  Governments never want budget surpluses.  They want to spend everything they can (the budget), plus more (the deficit).  It's fun spending other people's money, so they always run deficits.

Politically, spending money yields fame, power, influence, wealth, etc.  Since there is almost no "pressure" to combat fiscal irresponsibility (all interest groups want their cut, and they are the ones with the pressure), deficits are always-big-and-getting-bigger.

But, I bet you already knew that.  ;-)


Sat, 05/29/2010 - 19:09 | 381527 DosZap
DosZap's picture


Plus,if you have a surplus, the following year is difficult to INCREASE..................

Local & State Gvt's do this lose your cut of the pie.............IF it's not ALL USED.

Sat, 05/29/2010 - 20:31 | 381629 ArsoN
ArsoN's picture

Thank you, Professor Mikla.  But isn't it also good to run a deficit as long as you grow faster than you borrow?  So if your GDP grew at 5% you could have a deficit of 4% of GDP.  This implies that you generated a positive rate of return on your investment (providing the financing/debt servicing costs don't ruin it).

Sat, 05/29/2010 - 21:10 | 381667 mikla
mikla's picture

But isn't it also good to run a deficit as long as you grow faster than you borrow?  So if your GDP grew at 5% you could have a deficit of 4% of GDP.  This implies that you generated a positive rate of return on your investment (providing the financing/debt servicing costs don't ruin it).

Yes, that's true.  However, this brings in two things:

  1. Increasing roll-risk.  You borrowed more, so you have to keep rolling more debt (issue new bonds as your old ones expire).  This means you increasingly *require* stable capital markets, and you're increasingly at-risk to a favorable interest rate (if the bond market demands higher rates from you, that will really hurt).  The FALSE assumption is that the bond market will grow in capacity as your borrowing needs grow (e.g., tied to GDP):  NO.  At some point, the bond market must correlate to the "real" economy, which never grows as fast as the "financial leverage" economy.  However, as you mentioned, it's possible to walk this thin line (of "leverage") while things are "nice".  Of course, governments don't save for a rainy day, and rainy days come ...
  2. Liar statistics.  GDP is mis-calculated, and mis-reported on purpose (it doesn't reflect productivity).  Rather, changes in GDP for the last couple decades are merely changes in debt.  When we say a country has "only" 90% debt-to-GDP, it's a little silly because the government doesn't *own* that GDP (the private sector produced and owns that, the government merely takes a cut).  Further, that "90%" isn't real -- the government's liabilities are FAR higher than what's reported, and the "real" GDP is FAR LOWER than what's reported.

You are correct that leverage can give you net positive return -- but that assumes we spent money on something worthwhile.  In the real world, we set fire to piles of money (for no gained value) and call it GDP.  We build "bridges to nowhere" and call it GDP.  We account for future expected profits that aren't real, and call it GDP.

So, if you take out leverage for *real* productivity -- fine.  But that's not what we do, and that's not what will happen.  Give Greece a zillion billion dollars -- their "real" GDP won't move an inch.  They won't export any more olive oil than they do today (and quite possibly, they will export less).  That's "diseconomies of scale" and "increasing overhead".  Almost the entire $1 Trillion US stimulus is that (almost no productivity), and the $1 Trillion EU pledged bailout is the same thing (nobody will be more productive as a result).

Sat, 05/29/2010 - 23:36 | 381815 bc0203
bc0203's picture


Sun, 05/30/2010 - 08:28 | 382041 Trichy
Trichy's picture


And would add the Feb is investing in GDP growth as if it was an asset. They have seriously learnt the lesson of the French, who used to employ people to dig holes in the ground, just to be able to fill them again.

Sun, 05/30/2010 - 10:06 | 382097 Lux Fiat
Lux Fiat's picture

GDP is mis-calculated, and mis-reported on purpose (it doesn't reflect productivity).  Rather, changes in GDP for the last couple decades are merely changes in debt.

Very thought-provoking take on things.  Goes back to that old saying that you get what you measure.  In spades.

Can we send Bernanke to the ECB in exchange for Smaghi?

To the person who junked mikla's comment - at least have the decency to explain why you thought that this deserved junking.  That would serve to further discourse and understanding, instead of sowing confusion.

Great job ZH - it is articles such as this one that keep me coming back.


Sun, 05/30/2010 - 15:35 | 382464 Votewithabullet
Votewithabullet's picture

That "junking" feature is fucking useless. I will not donate to ZH as long as it exists.


~sarcasm~ on

Sun, 05/30/2010 - 11:00 | 382155 ISEEIT
ISEEIT's picture

Thanks Mikla:

If I weren't previously indoctrinated, educated to know better, I might begin to suspect that modern society is basically a crop being harvested by a bunch of elitist.

Could you PLEASE define Liberty 33 for me????

Sun, 05/30/2010 - 11:11 | 382171 mikla
mikla's picture

Liberty 33 is a reference to the Federal Reserve Bank of New York, (at 33 Liberty Street, downtown Manhatton, New York City, New York, USA) through which "the Fed" handles most of its market operations.

Sun, 05/30/2010 - 11:15 | 382175 juangrande
juangrande's picture

address of the fed? liberty 33?

Sun, 05/30/2010 - 13:33 | 382327 sgt_doom
sgt_doom's picture

Wall Street, Broad Street, Park Avenue, Main Street and Liberty 33.....

Sun, 05/30/2010 - 17:51 | 382601 Rusty_Shackleford
Rusty_Shackleford's picture

Also, please consider for a moment that GDP is not the Federal Government's "profits" or "income".


People tend to think of GDP as it applies to the Federal Government like they think of their own salary as it applies to them.  This is an inappropriate analogy.


This would be akin to the owner of a company including the incomes of all of his employees as his own when he applies for a higher credit limit on his credit card.  The GDP does not "belong" to the state.  It is the sum total of all economic activity in the country INCLUDING government borrowing and spending.

The only reason it is used when talking about a country's debt, is because THAT's the number THEY want to use.  It makes it look better for them.  3% of GDP doesn't sound so bad.


Again, would the owner of a factory be able to borrow against the sum total of all the incomes of all of his employees?  Of course not.


It's all BS.


If anyone else is interested in a basic lesson in inflation and why the government likes it, consider checking out Irwin Schiff's "The Kingdom of Moltz".

Sat, 05/29/2010 - 22:29 | 381744 New_Meat
New_Meat's picture


Sun, 05/30/2010 - 07:43 | 382026 exportbank
exportbank's picture

As I thought.. Inflation and deficits are political instruments that have nothing to do with the long-term betterment of society.

It's like one of my other theory's - "Pension Plans don't exist to provide pensions".

Sun, 05/30/2010 - 08:58 | 382060 mikla
mikla's picture

+1 ... I completely agree with what you're saying.  I will now say something else, and I don't want it to undermine the fact that I believe BOTH your statements are true.

It's possible that a targeted inflation rate (like 2%-3%) does actually benefit society.  It *does* result in increased activity.  Yes, it's not "free" -- the savers are punished (it is a mere hidden tax extracted by government from the poor).  I don't like the central planning aspect (I don't trust their intentions nor competence), and it inevitably amplifies "booms" and "busts" (it's hard to quantify its impact on the natural business cycle).  However, there are a lot of moving parts, and this "priming of the pump" quite possibly has net positive effect.

So, I don't complain specifically about "targeted" inflation rates (they are fraudulently reported anyway).  Rather, I complain that the central planners violate the social contract by fiddling with the value of money in MASSIVE ways (don't trust and plan your life such that a goal of 2% targeted inflation will be achieved; we will see double-digit inflation again at a most inopportune time).

Mon, 05/31/2010 - 06:57 | 383307 WaterWings
WaterWings's picture

Great posts.

The central planners also use their alchemy to promote the ultimate racket: WAR

Sat, 05/29/2010 - 19:01 | 381515 Wynn
Wynn's picture

Thanks mikla

Sat, 05/29/2010 - 19:27 | 381557 RabidLemming
RabidLemming's picture

great answer

Sat, 05/29/2010 - 22:28 | 381741 New_Meat
New_Meat's picture


Sat, 05/29/2010 - 22:47 | 381756 KTV Escort
KTV Escort's picture

I wish my university professors could have been as crisp and laser accurate in their explanations as you.

Sun, 05/30/2010 - 11:04 | 382162 ISEEIT
ISEEIT's picture

I wish that every woman were as lovely as you (ass-uming) that is a actual pic of you.

Sorry for real if offended. I said it, but 100% I'm not the only one to think it.

Sun, 05/30/2010 - 00:00 | 381832 GNH
GNH's picture

Excellent post.  Inflation is arguably the biggest enemy of the investor.  So, if there was no inflation, one could take their cash and shove it in a coffee can in the backyard as a means of saving -- and not have to keep pace with inflation.  But, what would then happen to the financial services industry if we didn't have to put dollars "at risk" in order to keep pace? The industry would be decimated and the casino would not have all the forced players at the table.  


One more reason why they need inflation > 0%.

Sun, 05/30/2010 - 07:41 | 382025 pan-the-ist
pan-the-ist's picture


Sun, 05/30/2010 - 10:38 | 382129 philgramm
philgramm's picture

It never ceases to amaze me when I read examples like your mikla's explanation as to the vast financial and historical knowledge possessed by ZH'ers.   I am not at all versed in this field but I am learning so much from the articles but just as much from the comments section.  Kudos!!

Sat, 05/29/2010 - 18:55 | 381509 Fish Gone Bad
Fish Gone Bad's picture

Inflation is needed to create the business cycle.  Where the haves eventually become the have-nots.

Have you ever wondered it is illegal to use any money other than reserve notes to pay your (American) debts?  A secondary form of money may let a person escape the cycles of boom and bust.  Gold has always been considered a good storage of wealth, but it is hard to trade it at your local supermarket for food.

Sat, 05/29/2010 - 22:33 | 381748 New_Meat
New_Meat's picture

When the banks really seized up in early-mid Great Depression, local entities issued scrip to get around the lack of "approved" currency (Gold notes etc.).  Almost fell off my chair tonight when I heard that the local economy in and around Ithaca, NY has some form of exchange notes (scrip) for local barter exchange. 

We hear about Greece's underground economy; I wonder if Patterson can see this going on in Upstate?


Sun, 05/30/2010 - 00:06 | 381837 jeff montanye
jeff montanye's picture

i'm not sure of the details, but california has been using some kind of scrip in its budget woes for some time, i believe.

Sun, 05/30/2010 - 01:33 | 381898 snowball777
snowball777's picture

Cali's "IOUs" are/were/will be 3% bonds with a short-lived market supported by the bigger banks like BAC and the grey-market of ebay etc

Sun, 05/30/2010 - 07:43 | 382027 pan-the-ist
pan-the-ist's picture

I wonder if Patterson can see this going on in Upstate?

I caught it Ned.  Patterson is blind... :)

Sun, 05/30/2010 - 18:28 | 382640 New_Meat
New_Meat's picture

lmao--but seriously, we've been looking down our noses at the Greeks, wonder what the underground economy is in US.  I've had a gasfitter in here in Feb.  Asked if he wanted cash, he said "no".  Asked if he knew Jimmy Carter.  He said "no."  I said "you'll learn".  Last night, gave the waitress extra cash--said "you'll learn".

Ithaca is so much fun: the moonbats have no clue how their "perfect" environment is utterly supported by the world sending cash (er... students) to the area.

Carl Sagan rolling over in his grave.  He was "all-in" for global "COOLING" to avoid whatever.

so it goes.

- Ned

Sun, 05/30/2010 - 18:38 | 382650 contrabandista13
contrabandista13's picture

You can convert gold to dollars as you need to....  Or you can hedge your paper currency in the futures market without actually owning the bullion or coins, it's not too difficult to do...








Sat, 05/29/2010 - 17:19 | 381403 John McCloy
John McCloy's picture

  Because the debt they have accrued in past decades has made that an impossibility so instead they use words like manageable.Manageable until we reach the point we have arrived at today. 

Or in short because credit would be vaporized and banks would no longer be able rely upon the citizens as their American Express black card. Instead we have debt slavery because we are told the world would end when in fact it would be the complete opposite and economic liberty for all.

Sat, 05/29/2010 - 17:29 | 381410 Mako
Mako's picture

"complete opposite and economic liberty for all"

That sounds like Ron Paul, unfortunately for Ron Paul he is mistaken, remove the credit system and death, starvation and chaos will be word for a generation or two, of course it's going to happen anyway.  Sorry, there is no free lunch, people have been getting a free lunch for 66+ years... the bill is going to be very high indeed this time. 

Wake me up if I am still alive in a generation or so, my estimate is probably 2 generation lose.  Japan will be going through the process I figure maybe 3 generations if you mark their peak from 1989.  

Maybe in a generation or two, humans will be able to choose a different choice, until that time... you are turd riding the ocean waves that are much bigger than you could even imagine yourself being.  

"There is no out, there is only in"

A price will be paid, billions will have to go.

Sat, 05/29/2010 - 17:42 | 381435 cossack55
cossack55's picture

I understand turds are oblivious to crude oil.  So we got that going for us.

Sat, 05/29/2010 - 18:00 | 381450 Apostate
Apostate's picture

Mr. Paulson?

Is that you?

Sat, 05/29/2010 - 21:25 | 381686 thesapein
thesapein's picture

Hah, I be wondering same.

The poster sounded so threatening...

Sat, 05/29/2010 - 18:03 | 381454 John McCloy
John McCloy's picture

  Mako I am not saying credit will not return. As long as there is a neighbor there will be credit. I just do not subscribe to the "mushroom clouds" hypothesis so many in the govt push because severe credit contraction would difficult but surmountable. I am not for fractional reserve lending especially to the tune of 10-1 yet we have come too far to have anything short of  pile drive landing. I believe people are making their choice now with increasing numbers and although that number is still miniscule compared to what is necessary to have drastic change it is growing and it will become exponential. Personally I would prefer to get on with the Mega Depression as opposed to ensuring that my great great grandchildren are living in a 1984 world. Then again I am only in my twenties yet would not find it honorable to sacrifice my future generations freedom for my own personal benefit..if that were the case what kind of a Great Great Great Grandfather would I be?

Sat, 05/29/2010 - 21:38 | 381695 Monkey Craig
Monkey Craig's picture

McCloy- Thanks for mentioning 1984. I'm sure that TPTB want this as the outcome, and this will be run by a global central bank. If we have some type of a debt crisis, then Social Security and pension plans will be worthless. Then people will beg for the microchip. It's very positive that those within the ECB are critical of US central planners.

Sun, 05/30/2010 - 01:22 | 381890 Bringin It
Bringin It's picture

re. ECB

I hope so.  Where's the German court challenge?

Sun, 05/30/2010 - 01:40 | 381903 snowball777
snowball777's picture

I'll give you $9.2B reasons they're full of shit.

Sun, 05/30/2010 - 10:42 | 382133 philgramm
philgramm's picture

It's likely that the future will be more like "A Brave New World" than like "9184".  It's much easier to control large populations if they believe they have "freedom" and "choice".

Sun, 05/30/2010 - 10:43 | 382137 philgramm
philgramm's picture

typo "1984"

Sun, 05/30/2010 - 14:44 | 382413 RichardENixon
RichardENixon's picture

Huxley's world was far wealthier than Orwell's. Orwell's prediction of the economic future was more accurate.

Sat, 05/29/2010 - 18:27 | 381474 murray
murray's picture



I've seen your assertions on many threads here and would like to understand some of the specifics.  In particular, an answer to the following questions:


1) Your general thesis is that global exponential population growth and resource demand, enabled by exponential credit use, have far outstripped sustainable production capability, so there must be a sizeable correction in population size and resource demand, correct?


2) That this correction will include a general loss of confidence in the worthiness of credit (debt money) to procure resourcees, goods and services is obvious, I think, yet you continue to make the claim that even an individual with real assets (free market money like gold and silver or, perhaps, auto repair skills) will not be able to procure resources, goods and services because the collapse in their availability will be so absolute.


My main question, then, is why will this collapse in resource, goods and services availability be so absolute?  Is it that such a large percentage of the current production of r, g and s is unsustainable without credit?  Or that governments and militaries will sieze much of the r, g and s production when the crisis hits?


Could you expand on what this crisis might look like in a major US city, say Los Angeles, where water is piped in from Norcal by city and state governments and food supply is brought in by truck from, I think, mostly (fairly nearby) central California.  Will these supply lines mostly shut down when the crisis hits?


Clarification would be much appreciated.


In my view, the only way to ensure an individual's availability of r, g and s is to live in an uncrowded location near plentiful production of, especially, water, food and energy?


Is this the individual's solution?


Sun, 05/30/2010 - 09:08 | 382066 AnAnonymous
AnAnonymous's picture

Nice try to frame a problem to force your own solution.

Sun, 05/30/2010 - 19:26 | 382691 Kayman
Kayman's picture


You being a master of tautology, it must have been clear to see.

Mon, 05/31/2010 - 03:27 | 383226 AnAnonymous
AnAnonymous's picture

Interesting remark. The US has done so much in denying obvious facts that tautologies have become  uncommonly needed.

Mon, 05/31/2010 - 04:59 | 383273 bob resurrected
bob resurrected's picture

Let me take a wild guess: Are you trying to justify your own opportunism as you sip beer in a Yangshuo Western-style cafe along the Li River? Do you feel guilty?

One need only google China + duplicity to see its contribution on the world stage. Or, ask Sima Lu, a renowned historian of the Chinese Communist Party who is currently living in New York City. This venerable revolutionary was a comrade-in-arms of Chinese President Jiang Zemin's foster father, Jiang Shangqing, said, „on the basis of his nearly 70 years of contact with the CCP that the more the party is publicizing something, the less it can be believed.“

 Or, as David Bandurski From The Australian put it, "Yes, certainly China's leadership. It has demonstrated again and again that its promises are little more than fetching slogans it can interpret as suits its broader political ends.“

No judging here brother, we are all, including you, in the words of Blaise Pascal, „un monstre incompréhensible.“ And, the US, and all others, are now following China’s lead, going headlong into State Capitalism. Give it a rest. The US is no worse than any other state.

And besides,

n? zhège xi?obáili?nr!

Mon, 05/31/2010 - 07:20 | 383315 WaterWings
WaterWings's picture

Framed very well. Most fail to comprehend the implications of collapse - all their economic thoughts are in a vacuum. The logistics of feeding millions of non-producers with a crumbling infrastructure and a failed currency...if you have gangrene you have gangrene. You can't wish it away. Most have not read gov't plans for Continuity of Government either. We'll just call it "conspiracy theory" so we can ignore it - even with ample, visible evidence that those in power actively conspire against their fellow citizens.

The delicate ecosystems of knowledge and understanding will be destroyed for generations - with so much free information and understanding most still choose mundane filth for their daily information intake - as if it will be cherished once neighborhoods start burning.

We are doomed to repeat it as a society.

+1 for Mako.

Sat, 05/29/2010 - 19:16 | 381540 Spitzer
Spitzer's picture

Yes, thanks to the credit system being managed by Keynsians.

Do you think this would have happened if Peter Schiff was at the controls throughout the last 30 years ?

Sat, 05/29/2010 - 19:44 | 381575 dcb
dcb's picture

"remove the credit system and death, starvation and chaos will be word for a generation or two"

this statement is such propaganda hogwash it makes me puke. I don't have time a really refute. but before the early 80's debt levels rose in proportion to the growth of nominal gdp. ceo pay was 30X instead of 300X, one worker could raise a family, we had more wealth equality. at this time a person had to make a living wage because credit could not be used to offset decreased wages. there are in effect two classes of people in our society. those who make a living on leverage (bankers, traders, ceo) and those that don't (rea wage earners). i.e one class of people get paid ROE, and the other ROA.  those who say we need so mcuh credit of course are those paid in ROE.

statements like this would imply we had no growth before the early 80's. it of course gets even worse because increasing debts create instability which has a huge cost when it blows up. (tragedy of the commons). which this person doesn't account for.

Look it is simple. when the payments of debt can not be supported by the rise in nominal gdp (unlevered GDP) it blows up. that is in effect out crisis. cheap credit allowed house prices to rise, mortages were given that had trouble getting paid if income was distupted, add to theat credit card, home equity withdrawl, add a gas bubble induced recession and the whole thing has to blow.

get rid of the easy credit, a car has to be affordable to be bought, smae as housing, and energy. all of these have to be cheaper and the rise will much more closely follow the rise of nominal gdp (wages).

ZH published a graph showing the level of margin in the stock market. lets say it was 50% of the total market value. get rid of that leverage (credit) stocks are 50% cheaper. it is via ever increasing leverage that ensures ceo's can easily make their bonus. add leverage increase roe, stock goes up increased bonus, added risk.

let us look at trading. cheaper credit allows trader bigger bets, more bonus. or securitizations. have this bigger bonus. more deals.

My assumption is all can follow. we can only get throught this crisis one way, and that is debt deflation, default. as long as we pretend something that can't be paid back (not income streams to pay the debt) the longer we will have the pain. But doing so impacts banker bonuses, means admitting banks are insolvent and nationalizing them. kills banker bonus, so it won't happen.

Instead we attempt to use the free markets to make banks solvent. false (mark to myth, zero fed interest rates). it allows banks to make profits, but diverts 40% into bankers pockets instead of recapitializing. disster policy, doomed to fail.

so policy by the fed/governments doesn't confront either the two real issues (bank insolvency/ too much debt). so it isn't working very well.

one more last point on the stupidity of the remark. suppose we hadn't had so much credit, then we wouldn't have hd the housing bubble, house wouldn't have gotten so expensive, so the banks wouldn't be sitting on so much of a loss (maybe they would be solvent), and we wouldn't be in this mess.  it is the excessive credit induced distortions on prices that have caused the problems. nothing more. too much margin in the markets caused them to drop so fast, too much in investment banks made them not be able to stay solvent, to much in housing caused further problems.

the credit causes distortions that effect the true pricing mechanisms of society. UGH.

Sat, 05/29/2010 - 21:47 | 381707 redbud
redbud's picture


Sat, 05/29/2010 - 22:33 | 381747 Ying-Yang
Ying-Yang's picture

Well said dcb.

My 60 decades of experience balance the distortions of our new normal and the reality I have lived through.

The growth of wealth disparity should demand a reset but I wonder if the younger generations understand this.

Thanks Tyler and others here for insightful reasoning and dead reckoning.

Peace... Ying-Yang

PS, I vote for captchs that don't require I popup my calc....groan

Sun, 05/30/2010 - 00:33 | 381859 Caviar Emptor
Caviar Emptor's picture

+1000. Let me chime in with my un-levered 2 cents:

"remove the credit system and death, starvation and chaos will be word for a generation or two"

The "Credit System" is exactly analogous to the Aristocratic System that existed in Europe before the 20th century. Call it "The Feudal System". Lords held power over their subjects through a system of credit: subjects were debtors and lords were creditors. The relationship involved land and agricultural produce back then, it still involves land (condos count) and the generation of income from other pursuits, but the game is the same. 

What most people don't get is that inflation actually does favor creditors because it ensures that they have the best chance of being fully paid with interest, or alternatively, that seized collateral always rises in price. Inflation keeps debtors on a treadmill that penalizes savings and encourages borrowing and leverage (and risk). Incomes always lag behind inflation. In our system, credit extended by a bank is considered an asset on the balance sheet, permitting further leverage and credit. 

Sun, 05/30/2010 - 01:25 | 381894 Bringin It
Bringin It's picture



End the FED fraud.

Sun, 05/30/2010 - 07:54 | 382030 pan-the-ist
pan-the-ist's picture

In addition, you're pushed to "invest" your money with the bankster's casino, because you lose money putting it under your matress or the bank.

Sun, 05/30/2010 - 02:15 | 381921 dumpster
dumpster's picture

remove the credit system and death, starvation and chaos will be word for a generation or two"

this statement is such propaganda hogwash it makes me puke. I don't have time a really refute. but before the early ..

why refute a brain dead   statement . save the breath for real economic results this person mako or what ever is a clue less Keynesian.


with long winded posts , these are yappers signifying nothing ,


Sun, 05/30/2010 - 06:54 | 382009 dcb
dcb's picture

A main problem is that those i higher office transmit this propaganda to the public and it gets reported without critical thought. so people blindly believe it. But it is critical to look at who says it, they all have a huge vested interest in having it. the worst offender that comes to my mind is william dudley of the NY fed. of course he turns out to be a goldman partner etc. so a "public official form the "private" fed makes a statement, people think it is good for them, and they don't rise up in opposition to financial tyranny.

I would like to say sorry for spelling erros. I didn't know about spell check until just now.

Sun, 05/30/2010 - 13:44 | 382343 Clampit
Clampit's picture

I for one love spelling errors; they are the fodder of concentrating on context over content. (Or is that the other way around? Whatever, it sounds good...) The world is too polished and corporate, mistakes require the reader to think and judge the message not the prose. And your message is golden.

Sun, 05/30/2010 - 06:14 | 382003 AnAnonymous
AnAnonymous's picture

at this time a person had to make a living wage because credit could not be used to offset decreased wages.




You have at least this wrong. This is the reverse. That is because the option to make a living wage was no longer available (for certain activities of course) that credit had to be used.

If you are a US citizen, then you have to look around and fast. You are denying a phenomenum large and open to all to see: spatial segmentation.


Sun, 05/30/2010 - 06:47 | 382008 dcb
dcb's picture

we will have to agree to disagree. guess it comes to chicken and egg. I would say advent of credit kept people from demanding better wages (living wages) until default stage. It kept reality hidden.

I do agree that wage pressures have much to do with economic policy of the united states, and I have lots of problems with much of it. for instance shipping jobs to a totalitarian dictotorship (china) where workers don't have rights is bad industrial and foreign policy. But a good way for corporations to slowly dismantle worket protections in the united states via unfair competition.

regarding inflation targeting. best way to think about it is that it rigs the system in favor of the bankers. I've been reading minsky on this and it is a scam.

Sun, 05/30/2010 - 09:09 | 382059 AnAnonymous
AnAnonymous's picture

No. That is not egg and chicken. But I saw right about the cause of the failure in analysis.


Shipping the job outside the US is not commanded by what you underlined.

Shipping the job outside the US is commanded by the fact that the US as a general environment is no longer favourable to a certain range of activities.

That is why I stated  the look around stuff. The whole US space is organized through a general environment for every bracket of income. There is an environment for blue collars, white collars etc...

It would never come to your mind that a shop clerk would want to live on Park Avenue. His job output simply does not correspond with the quality of environment.

And the whole US is organized this way, on a city scale, on a state scale, on the nation scale. Yet when it comes to expand the trend on the world scale, where the US is similar to Park Avenue, you would want a car worker to be able to live in the US?

That is why it is not chicken and eggs. A lot of activities are subsidized in the US. Car building jobs should no longer be available in the US. No longer the appropriate general environment for it. Corporations just do what the situation commands to: move certain activities out of Park Avenue.

Sun, 05/30/2010 - 18:57 | 382666 Kayman
Kayman's picture


Are you sure you are not the reincarnation of Timothy Leery ?  Your argument looks like an omlette to me.

I thought dcb clearly outlined that elimination of credit would not bring the end of mankind.

You are motoring on about class divisions and subsidization; don't see what that has to do with credit.

The U.S. has many peers in the subsidization and class division game.

Move to Communist Fascist China- they do not have class divisions and they sure do not subsidize their industry, n'est pas ??

Mon, 05/31/2010 - 03:33 | 383232 AnAnonymous
AnAnonymous's picture

Nobody has claimed that the end of credit would lead to the end of humanity.

The original post reads about chaos, death and starvation to be the word for one generation or two.

As the obvious fact is denied, tautologies kick in. Of course, DCB poster was able to outline that elimination of credit would not bring the end of mankind as the original poster never implied it would.

The outsourcing of jobs was commanded by a betterment of the general US environment. Just like it happened at a city scale, State scale and nation scale. When a general environment grows better, certain activities are excluded from taking place there.

You've got yourself a nice obsession with China. Did you feel you lost your job to a Chinese or something?

Mon, 05/31/2010 - 03:15 | 383212 merehuman
merehuman's picture


Sun, 05/30/2010 - 18:39 | 382651 Kayman
Kayman's picture


You are right on point.

Judicious credit is a valuable, but not essential tool.  Injudicious credit is a cancer.

Two examples that come to mind.

1. At one time car loans were only available for 3 years, now they are available for 5 years or more.  A 3 year life asset and 5 years to pay.  Perverse.

2. When things were blowing and going in the Alan Greenspan inferno period, leveraged buyouts abounded.  Why ? Because some whiz kids could calculate a discounted cash flow from a corporation's EBITDA and found free money(debt) made nearly any ridiculous buyout work.

Ultimately, none of this credit helps the real economy.  It does not make the country or its micro parts any more efficient, and it creates debt burdens that take away from the future economy.

You are going to have a hard time buying a new car after the 3 year honeymoon, when you still have 2 more years to pay for it.

Our Macro Maestros sure have their sphincter muscles firmly wrapped around their necks.

Sat, 05/29/2010 - 22:11 | 381724 faustian bargain
faustian bargain's picture

Just because disaster is coming, doesn't mean it's wrong.

Sun, 05/30/2010 - 00:19 | 381849 hound dog vigilante
hound dog vigilante's picture

"remove the credit system and death, starvation and chaos will be word for a generation or two..."  

Absolute nonsense.

"...of course it's going to happen anyway."

One man's death rattle is another man's freedom, economic or otherwise.  The rest of the world is going to get on with the business of living life w/o the diseased, rotten carcass of corporate fascism (NWO).  The choice is yours to make right now, not 2-3 generations down the road.

Resigning oneself to the fate of a turd in ocean is a cop-out.


Sun, 05/30/2010 - 09:39 | 382076 Hephasteus
Hephasteus's picture

If you think 2 generations are going to take you serious. You have lost it buddy. We'll play pin the fuck off on the donkey first. If there is no out. Then let's make being in hurt really bad.

I see your seriousness and raise you desperation. And call.

Sun, 05/30/2010 - 13:35 | 382332 sgt_doom
sgt_doom's picture

Actually, that comment sounds much more like Prof. Michael Hudson, brilliant macro economist who has been consistently on target over a forty plus year time frame.

Many still don't understand what the Wall Street bailout was all about:  restructuring that Shadow Banking System as the Main Banking System....

Sat, 05/29/2010 - 17:30 | 381418 asdf
asdf's picture

if the government wants to run a surplus, the private sector must run a deficit or the GDP has to fall. The government is not a household, it's a sector which can absorb private sector surpluses that can't be exported. 2 links


Six Impossible Things




Sat, 05/29/2010 - 19:18 | 381544 geoffb
geoffb's picture

Well shit if its in an economic equation it has to be true. Try adjusting GDP in that equation for inflation/deflation, CDS/derivatives, dubious financial innovations, or capture of regulatory structure. Oh, wait not in there. Oooppps. Keynesian economic equations are like voodoo. They only work for the people who believe in them.

Sun, 05/30/2010 - 13:37 | 382334 sgt_doom
sgt_doom's picture

And please don't neglect all that missing tax revenue, conveniently never paid by the multinationals, thanks to their profit laundering at all their OFCs, and their transfer pricing, and profit shifting and screwing everything that moves.....

Sun, 05/30/2010 - 19:09 | 382676 Kayman
Kayman's picture


Well, as a construct I accept mathematical equations.  As a tool to help assess social activity like GDP, they tend to be a little more normative than positive, especially from those who breath a more rarified air than  the great unwashed.

Figures lie and Liars figure- its always been a good measuring stick for me.

On the point of the article, it seems like all nations have rushed to the Keynesian side of the boat. I just wonder how many rabbits are left in the hat ??


Sat, 05/29/2010 - 19:24 | 381552 Spitzer
Spitzer's picture

I have never read anything dumber in my entire life, you must be an keynesian economics professor

Sun, 05/30/2010 - 04:24 | 381971 asdf
asdf's picture

instead of just writing ad hominem attacks, you could debunk the equations. You can't? Well, that doesn't surprise me.

Sat, 05/29/2010 - 18:37 | 381482 Kali
Kali's picture

Too responsible.

Sat, 05/29/2010 - 21:29 | 381687 Rusty_Shackleford
Rusty_Shackleford's picture

I know. 


It's like someone standing up and saying, "I have a plan for our prosperity which requires everyone's money to lose 3-6% of it's purchasing power per year."


Such a person would/should be immediately tarred and feathered.


Sun, 05/30/2010 - 01:27 | 381896 Bringin It
Bringin It's picture


Sun, 05/30/2010 - 07:19 | 382019 PhD
PhD's picture

The good old times *sigh*

Sat, 05/29/2010 - 23:12 | 381787 trav7777
trav7777's picture

An easy one:  debt must grow.  Debt IS the money supply.  It cannot go down, otherwise, parasitic interest drag implodes it.

Some maintain that government deficit IS the only source of money supply.  This is a notion which is partially true insofar as debtmoney systems go.

Sun, 05/30/2010 - 04:26 | 381969 thisandthat
thisandthat's picture


Sun, 05/30/2010 - 12:24 | 382261 Anton LaVey
Anton LaVey's picture

Please remember that inflation means a larger amount of money circulating in an economy. Deflation means the inverse: a smaller amount of money in circulation in the economy.

Target inflation exist because (a) banks create money through the fractional-reserve system (meaning: they lend money they do not have, and therefore create money out of thin air) and (b) because most governments also create currency by spending money they do not have (meaning most of them are running a deficit).

Most government target an X% deficit because a 0% deficit would mean raising taxes. And that would be very unpopular with the voters, who (mostly) refuse to face the fact that government benefits -- that they enjoy very much -- cost money and should be adequately financed, through higher taxes.

In other words, both are strongly correlated. Inflation comes -- in part -- from deficit, and deficit come from voters expectations.

Of course, I don't know anything, so make of that what you will.

Sun, 05/30/2010 - 15:32 | 382456 Kayman
Kayman's picture


The theory behind a slightly positive inflation number (say, the 2% number) is that the Great Economic and Political minds wish to stay away from general falling prices.  The corollary to the theory being falling prices would lead to delay in purchasing, leading to a shrinking economy.

If it is cheaper tomorrow than today, spending, especially consumer spending would be delayed.

somebody correct me, if I do not have this right. 

PS. the 3% deficit hypothesis is a parallel to longer term, sustainable 3% GDP growth. That being, even when governments are spending to the tune of 3% deficits, they are not spending more than the economy can/will grow over time.

Naturally, all of this is now out the window.

Mon, 05/31/2010 - 08:24 | 383355 TumblingDice
TumblingDice's picture

When new money is introduced into a system, future obligations of greater notional value have to be added as well. There is never new money in the system unless it is backed by debt plus interest. That means that the process has to be repeated again in the future in order to meet those obligations. New money has to be constantly churned out at a faster and faster rate to cover the obligations that came with creating previous money. Hopefully that explains the 2% inflation rate target.

Why do governments target 3% deficits. Their goal is never to actually pay down the debt. If they *tried* to do that, not even now, but at any point, the monetary system would collapse under its own weight. The goal of the government is to service its debt and take more out. Usually the private sector goes into enough debt in order for the banks to meet their 2% inflation rate, so governments only need to help out by going into debt a little bit. But in times like this the banking sector has to rely more and more on the most dependable spender, the government, to ensure their target rate of inflation. That is the reason for the ridiculous deficit spending of the USG right now. Private sector would not go into debt, so they have to fill the void in order to create enough money to meet past obligations.

Sat, 05/29/2010 - 17:24 | 381395 Mako
Mako's picture

"the Fed can and always will easily inflate its way out of any complication"

Sorry not possible to inflate out any complication, Tyler stay off the bong.  If you are correct than the Fed has unlimited power, tell Helicopter Ben to send me over a pizza, a 12 pack of beer and 99 virgins while he is at it.  Tomorrow I will probably need him to send someone over to mow the yard and wash the car.

This is complete hogwash.

"false economic religion known as Keynesianism"

The false religion is believing there a Helicopter Ben, never was a Helicopter Ben, never will be Helicopter Ben.  The system will collapse and liquidate, and it doesn't matter how many angry posts and how many charts you put up, or how many times you blame the bankers or the government.

Benny's job is the same as his Greenie's job, keep all you lemmings marching in the right direction, get you guys marching until you are exhausted, the when you guys are all tired out from marching, a gaint pit opens up beneath your feet.

Sat, 05/29/2010 - 18:53 | 381447 Duuude
Duuude's picture


What is your plan?

Also, these are Tyler's words in context...

Not too surprisingly, the ECB is now directly pointing a finger at the Fed, where conventional wisdom has long held the belief that due to its ability to determine independent monetary policy, backed by the world's reserve currency, the Fed can and always will easily inflate its way out of any complication.

Sun, 05/30/2010 - 05:09 | 381982 AnAnonymous
AnAnonymous's picture

 Many people want to escape death. Others say you  cant escape death. But what is those others'plan?


Mon, 05/31/2010 - 01:16 | 383144 fxrxexexdxoxmx
fxrxexexdxoxmx's picture

become death?

Sat, 05/29/2010 - 19:28 | 381559 Spitzer
Spitzer's picture

See ? 

Mako has been currupted by keynesianism so bad that he doesn't believe in capitalism or gold. Not to mention Austrian economics.

Sat, 05/29/2010 - 19:32 | 381565 Duuude
Duuude's picture

Or fucking sarcasm.


Ah shit...


Mon, 05/31/2010 - 07:30 | 383319 WaterWings
WaterWings's picture

Yes, the lack of a proposed solution is disconcerting - I agree with that point. The problem is getting a system in place before megadeath starvation sets in. We have allowed psychopaths to run the show for too long - and they will never release their parasitic grip without the threat of external violence - it is in their nature to usurp and pervert for their own ends. It's too late to save what we have as a society - only pockets of the vigilant have any hope of remaining free - as always throughout written history.

Mon, 05/31/2010 - 10:09 | 383450 WilliamC
WilliamC's picture

Well let's look at the entire quote you snipped a portion of in order to mis-represent the intention of the original post.

"Not too surprisingly, the ECB is now directly pointing a finger at the Fed, where conventional wisdom has long held the belief that due to its ability to determine independent monetary policy, backed by the world's reserve currency, the Fed can and always will easily inflate its way out of any complication."


From which you took the last passage and erroneously implied that Mr. Durden is himself claiming that 'the Fed can and always will easily inflate its way out of any complication.' 


It is obvious in the context of the larger quote that Mr. Durden is merely stating that 'conventional wisdom' attributes the ability to the Fed to 'easily inflate its way out of any complication.'


If you don't think that is a true statement, tell us. But don't insult us by suggesting that's what was originally said.

Sorry Mako, you better remove the huka from your own lips before suggesting that Tyler put down his bong and  then perhaps you can swallow your own hogwash, 'cause that's exactly what you are trying to pass off as some sort of intelligent commentary.



Sat, 05/29/2010 - 17:19 | 381396 akak
akak's picture

"is the beginning of the end for Keynesianism approaching?"

Despite having maintained its sociopathic grip on Western economic orthodoxy for decades, the intellectual and moral abomination of Keynesian was stillborn at birth.  All that remains to be done, at least in a philosophical sense, is to acknowlege its death and bury its ugly and rotting corpse.

Sat, 05/29/2010 - 17:49 | 381441 nmewn
nmewn's picture

With no headstone I would add.

The idiotic theory was imported here in a crate in the bowels of a frieghter from Russia and was disproved in the 70's when they tried it on live humans (Stagflation, you see, is an impossibility under his theory) yet they kept screwing around with it in our schools of "higher learning"...then, an accident in a university lab one day caused a Japanese exchange student to become infected, he went home to convalesce...and of course the rest as they say is history ;-)


Sun, 05/30/2010 - 19:42 | 382710 Kayman
Kayman's picture

Come on People

It is the Perversion of Keynesianism that we have here. John Maynard purported spending surpluses in the economy (including borrowing from the future) WHEN YOU WERE IN A DEPRESSION. He did not espouse spending like a fucking drunken sailor during good times.

And he had a lot more respect for the MONEY SUPPLY  and credit than that fucking idiot Greenspan (and Bewildered Ben) ever had.

The sad fact is that Keynesian tools no longer work.  We are indebted up to our eyebrows and the idiots at Treasury and the Fed are printing and borrowing like Nero to solve the problem.

THE PROBLEM IS: THE FED AND TREASURY- these guys think, just one more snort will do the trick, instead of going into rehab.

Let the poor old academic and bond trader rest in peace. Even Zero Hedge gives the nod to JMK- "in the long run we are all dead"


Sun, 05/30/2010 - 22:29 | 382925 faustian bargain
faustian bargain's picture

The fatal flaw in the 'save in the good times, spend in the bad' theory of governmental economic meddling is, as you come close to implying, it ignores the nature of the humans in government. In other words, it assumes they will know when to stop, or that they will even want to.

Mon, 05/31/2010 - 07:47 | 383329 nmewn
nmewn's picture

LOL + a gazzilion fiat bought votes ;-)

Our public schools have done an astounding job of shrouding the six lane bridge of fiscal logic in a fog ...the public emerges from these schools knowing it most balance it's checkbook monthly or someone comes and starts taking their "stuff"...yet most cannot see the other side of the bridge as it applies to government itself as well...really a remarkable feat of indoctrination when you think about it.




Sat, 05/29/2010 - 17:19 | 381402 Coldcall
Coldcall's picture

so i take it he voted with the Germans on the ECB against the Trillion dollar bailout.

Also I'd say he is being overtly diplomatic re the Keynesian nightmare.



Sat, 05/29/2010 - 17:34 | 381406 Atomizer
Atomizer's picture
Henry Kissinger New World Order 2007     Kissinger Calls on China to Join the New World Order   Soros: China Must Be Part Of The New World Order   /*/-+1215   Kissinger talks about the New World Order 2005
Sat, 05/29/2010 - 17:38 | 381428 breezer1
breezer1's picture

looks better for gold every day.

Sat, 05/29/2010 - 17:42 | 381434 walküre
walküre's picture

Great article.

The key to our future is sustainability. The planet and the resources are limited in size. Population growth ad infinitum will inevitably result in major problems unless we're all willing to make major concessions to the quality of our life (styles).

What we need is a sustainable quality of life.

Demographics are irrelevant. When one points out that Europe has poor demographics, I argue that Africa sure has great demographics and leave it at that.

If less Europeans want to maintain the same quality of life for example, they will have to pay more for it. That makes sense. It is sustainable.

Politicians need to realize that our current socio-economic models based on growth are already unsustainable which is why we're in this rut and also decreasing the quality of life for most.

Deflation and reduction are not economic death cults.

Sat, 05/29/2010 - 19:00 | 381514 SwapThis
SwapThis's picture

I would have to disagree that "the key to our future is sustainabilty".  We have sustainabilty now in every meaningful way, we just are not allowed to enjoy it.  The real issue is that the puppet masters of the UN/IMF/FED/OECD etc do not want us to leverage what we can already do: feed the world, provide cheap energy etc, if we put our best minds and technology to the task, because they do not have a 'socio-economic model based on growth', but rather a socio-econmoic model based on control. 

In case you have not noticed, we are depopulating via low brith rates in every westernized culture, including China.  This is by design with UN backed 'one child policies and the like.  We are fearmongered into believing that there is a terrorist behind every Starbucks, while we allow $Trillions to be stolen to tied to the backs of our future generations. We could sustain our selves just fine in my opinion if the banksters didn't provide us with pathetic choices of leadership who will not commit to solving our real issues, but rather continue to try to keep the populations scared and running as fast as they can over the cliff of debt and ignorance.

I have been to Africa many times and seen first hand that the issues there or India etc can be addressed successfully if people would stop flooding that continent with small arms, political unrest & muslim zealots.  We don't have sustainability because it does not make $$ for those selling Oil, guns and false promises of the western style 'good life'.

We have sown the wind, and will reap the whirlwind.




Sat, 05/29/2010 - 19:55 | 381554 velobabe
velobabe's picture

We have sustainabilty now in every meaningful way

could of fooled me with that statement.

jeeze. natural resources????


                 white gold

that's my precious metal.

north america, supposedly has the most available fresh water in the world.

it is drying up, not at a sustainable level, as far as i can see and have read.

just my direct, 2¢'s

am a worry wart, though. mother earth and all†

Sat, 05/29/2010 - 23:31 | 381809 robobbob
robobbob's picture

cheap energy = water

4/5ths the world is water

All desalination plants need is cheap electricty. and with cheap water, a desert can become a garden

mankind has the tools to solve any problem. instead we are being fed the lie that self extinction and slavery is the only option. Why? the rarer the resource, the greater the power of those who control it.

That does mean dumping toxic waste because you're too cheap to process it. or ordering 4 cheeseburgers when 2 will do. It means, be reasonable

Sat, 05/29/2010 - 23:56 | 381829 trav7777
trav7777's picture

Fuck cheap energy dude...all we need is perpetual motion and antigravity.  Free energy.

It's obviously being kept from us by those Laws of Thermodynamics.  Why can't we just freaking repeal them?  I mean, think of the fking children!!!!!1

Our dreams are the only limits facing us, not physical laws or math.  Reality will do us the favor of conforming itself to our wishes if we just focus them strenuously enough.

Sun, 05/30/2010 - 07:51 | 382029 PhD
PhD's picture

There are very few things that would quicken our demise more than free energy.



Just look what we did with our free credit.....

Sun, 05/30/2010 - 10:14 | 382103 SwapThis
SwapThis's picture

That statement sir, with all due respect,  is simply nonsensical.  We have free energy now in several forms, solar, tidal, geo-thermal etc.  The cost is in utilizing them and I submit these costs can be brought down to levels which could be successfully absorbed by a given society to the level that would make them able to be available to the populace at very very low cost.  Again, we have to have leadership with vision and integrity of moral and ethical character, all of which is at negligible levels inside the beltway.

We must get outside the boxes we live in to see that they can be made in different, and better shapes.


Sun, 05/30/2010 - 08:12 | 382033 pan-the-ist
pan-the-ist's picture

Trav, you forgot your sarcasm tags!  You're confusing the MBAs.

Sun, 05/30/2010 - 08:14 | 382034 pan-the-ist
pan-the-ist's picture

This is true, however, PHD is right, free energy would finish the earth off.

Sun, 05/30/2010 - 13:05 | 382302 trav7777
trav7777's picture

nope.  Free energy would permit space travel and the ability to clean up any mess.

Free energy means that there is no limit to growth or upward mobility.

Don't confuse what we have with free energy.  There was no deepwater spilling when we had supergiant fields being discovered all over.

Sun, 05/30/2010 - 14:50 | 382416 Kali
Kali's picture

No such thing as a free lunch.  " We just need capability to utilized this free energy".  Capability will use resources of some kind. Wind turbines, tidal generators, they all use concrete, limited resources.  BTW, China has almost all the rare earth metal reserves you need for your wind turbines and Prius'.  You cannot break the laws of physics.

Sun, 05/30/2010 - 19:53 | 382723 Kayman
Kayman's picture


If only we could transport ourselves back in time and place to Rome where we could debate important issues like, "how many angels can dance on the head of a pin."

But for the AMERICAN OIL LOBBY and the MIDDLE EAST OWNERSHIP OF AMERICAN POLITICIANS,  we could be off of oil in one decade.

Oil and energy are not the problem. Crooked politicians are the problem.

Sun, 05/30/2010 - 09:26 | 382073 SwapThis
SwapThis's picture

I stand on my statement, including water resources.  We have plenty of water, we are not using it correctly and not applying tech resources to draw and manage it effectively. We live on a 'water world', with a concerted effort to master desalinization methods, in addition to gray water recapature and reuse, rain water collection etc, we can easily overcome the any percieved short fall in resources.  Again, the problem lies in our leaders lack of vision, and lack of understanding that they are servants of the people, and not elected con men who owe their service only to those who either contribute huge sums or have pictures/tapes of them in compromising positions.  We can do much more than those at the levers of power want us to believe, we need to wake up or perish.



Sun, 05/30/2010 - 16:46 | 382520 Kali
Kali's picture

And who is gonna do it?  I have worked all my life on these types of things (30+yrs), as in engineering them, not just flapping jaws about it.  Every method has it's draw backs.  De-salinization, look at the mountains of salt piling around the worlds biggest desalinization plants.  Garbage in, garbage out.  I admire your utopian wish, but it is not feasible, not as human society exists today.  And there are powerful, sociopathic forces fighting any progression in this area, lest they lose their wealth and control.  Not to mention that you cannot break the laws of physics.  The best thing anyone can do at this point is to STOP REPRODUCING.  We can't even control our gonads let alone anything else.

Sun, 05/30/2010 - 17:29 | 382586 pan-the-ist
pan-the-ist's picture

You need a license to operate a car, but you only need gonads to make a baby.  Problem is, as soon as you mention controlling reproduction the Christian right will be all over it. 

Their culture (in general) does not put any value into the mundane, they live for tomorrow (existence in heaven?) and think life is a punishment.  That alone is a good reason to be anti-Christian.

Sun, 05/30/2010 - 19:56 | 382727 Kayman
Kayman's picture



(tongue firmly in cheek)

Sun, 05/30/2010 - 20:21 | 382755 Kali
Kali's picture

Poor thing, i feel so sorry for young people today and especially for children.   Already done,  I did not or will not (no uterus anymore) reproduce.  Unfortunately, you have to THINK to be able to do that.  LIke Judge Judy says "any idiot can have a baby, dogs can have babies."  :)


PS- However, I have had to take care of other people's children because they could not.  Lucky for the kids.

Sun, 05/30/2010 - 13:44 | 382342 sgt_doom
sgt_doom's picture

Which is why the major land owners gobbled up the conservation lobby into their deep pockets.

Ever wonder why the League of Conservation Voters has former directors such as Obama appointee Carol Browner, whose hubby is an ExxonMobil lobbyist?  Or a state chapter director who was Nixon's son-in-law and worked for how many Republican presidents???

Or a former chairman of the entire league who is affiliated with that number one neofeudalist-promoting organization, the Peterson Institute?

And don't get me started on the Sierra Club!  (All of these so-called conservation groups now exist primarily to hide and obscure the concentrated land ownership extant, as well as accumulating tax benefits and subsidies for land declared conservancies by those groups.)

Sun, 05/30/2010 - 18:22 | 382633 velobabe
velobabe's picture

i had my suspicions of this my whole life. thank you for confirmation. my sister would yell at me and tell me no such conspiracies exist. sierra club should rot in hell, actually. base all their fundamentals on a funking horses' rights. you have no idea what they have done to the west's national forests and the god damn rules. horses have more rights than humans.

i had to grow up with these horse elitists, honest rich people are really over rated and quite boring. judgemental about everything. white rich horse riding females are the worst, period.

Sat, 05/29/2010 - 21:53 | 381711 thesapein
thesapein's picture

I would go further, pointing out that "sustainability" is merely a sentiment for what to be old fashioned about. In the real world, perpetual motion machines do not exist, entropy will always be the gravity on life, and nothing last forever.

We may struggle to retain the things we want to carry into the future, but we are doomed to fail if we think we can stop evolution, all together. Given enough time, all will be replaced, as sure as death (and novel life) itself.

Sat, 05/29/2010 - 22:50 | 381761 Kali
Kali's picture

precisely, enthalpy and entropy.

Sun, 05/30/2010 - 12:24 | 382262 thesapein
thesapein's picture

life is the edge, navigating the border between order and chaos

Sun, 05/30/2010 - 16:52 | 382537 Kali
Kali's picture

life is the edge, navigating the border between sanity and insanity. :)

Do NOT follow this link or you will be banned from the site!