Guest Post: Anatomy Of A Crisis: 2011

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Anatomy of a Crisis: 2011

What's behind the disturbance in the financial Force? QE, ZIRP, the dollar peg and inflation, to name a few factors.

There is a great disturbance in the world's financial Force. Many sense it as a storm on the horizon, something not yet visible but telegraphed by a rising, swirling wind and a new electric scent in the air.

I don't claim to have a complete narrative that accounts for all the points of friction wearing down the moving parts, nor do I claim a "solution." But a few observations might help inform our awareness of the disturbance.

As many of you know, readers provide most of the intelligence on this site ("of two minds, yours and mine"). I am the student and skeptic who learns from you and tries to make sense of a few dynamics, and extend them to some sort of coherent end-state. We share the same project of encouraging critical thinking.

1. There is a rising loss of faith in the conventional (i.e. propaganda) account of the U.S. economy. Readers tell me their local coin store has no silver coinage left, as the public has been buying with a vengeance. This is significant. (Silver has long been called "the poor man's gold.")

In the conventional view, the "herd" always gets it wrong: the "retail" "small speculator" investing public buy stocks and real estate at the top just as the "smart money" is distributing/selling. This "dumb money" cycle is certainly evident in manias and bubbles.

But there are also examples of "the public" acting well in advance (perhaps a form of "crowdsourcing") of the "experts."

One of the most remarkable trends of the past decade is the steady rise of the classic hedges against inflation and financial disorder: precious metals.

While the Federal government and a veritable army of conventional economists have repeatedly assured us over the past 10 years that the economy and the dollar are both sound, gold has quintupled from under $300 an ounce to over $1,500 an ounce.

Given that official inflation measured 26% for the decade 2001 - 2011, then clearly the public isn't "buying" the "sound dollar, sound economy" story.

They're also not buying the "you can't afford not to own stocks in the New Bull market" story: the public has sold some $350 billion of domestic mutual funds in the past two years.

These are unmistakable signs that the public has lost faith in the Federal Reserve's account of the dollar, U.S. stocks and the economy.

2. The idea that quantitative easing is benign has lost credibility. Even the MSM is reporting the dismal real-world results of QE2, for example, Stimulus by Fed Is Disappointing (understatement of the year?).

Another conventional view of QE--that it isn't "injecting liquidity" because it's simply an asset swap-- The end of QE and what it means for the market--misses the point, which is that boosting bank reserves (what QE accomplishes) enables additional leveraged 20-to-1 (or more) lending. QE also keeps U.S. interest rates near-zero, which encourages a carry-trade of dollars flowing around the globe seeking higher returns and offsets to global inflation, which is certainly higher than officially recognized. It’s this flow of cash that’s driving up commodity costs.

A T-Bill sits there earning interest but cash is mobile--it can go anywhere to seek a return. A T-bill cannot. So QE is not just some benign asset swap--it has the pernicious effect of feeding a vast risk trade in stocks, emerging markets and commodities.

If that flow of new cash ceases (QE ends), then the risk trade (and Treasury bonds) both lose a key support.

3. Much of the analysis of U.S. policy is narrowly U.S.-centric. The U.S. has often ignored the international consequence of its parochial concern with domestic politics. Indeed, the U.S. has dropped 5 million tons of bombs and killed 500,000 people (as well as cost its own citizens their lives) overseas in pursuit of domestic policy ("we can't 'afford' to lose Vietnam to the Commies because that would cost me the election.")

This blindness to the consequences of domestic policy is most striking when it comes to China.

The key dynamic is the linkage of the renminbi (yuan) and the U.S. dollar.
When the dollar tanks, oil rises when priced in dollars--and thus it also rises when priced in yuan. Thus the decline of the dollar and the consequent rise in commodities has directly fueled inflation in China, which is more dependent on a per capita basis on materials than the U.S.

Yes, the yuan peg has declined from the 8.5 range down to 6.5 to the USD, but it is still firmly pegged. As the cost of materials priced in dollars soars, it feeds higher input costs in China.

China's policy-makers have exacerbated inflation by excessive money creation and lending by their own banks, but that alone is not sufficient cause for gasoline/petrol to cost as much in China as it does in the U.S. Oil is the foundation for petrochemicals, fertilizers, transport, plastics, etc., so the rise of oil driven by dollar depreciation is a driver of inflation throughout the Chinese economy.

No wonder the Chinese leadership is unhappy with the Fed's crush-the-dollar strategy.

Though the cost of soy beans imported from the U.S. remains fixed in terms of currency, the relentless rise in oil is also raising the cost of China's imports which are heavily dependent on oil, such as soy beans from the U.S.

4. China appears to be in the grip of a classic wage-price spiral inflation.
Minimum wages are leaping by 25%, prices of many food items are doubling--this self-reinforcing dynamic is clearly visible in China. That is not the case in the U.S., which is being throttled by stagflation (rising prices and stagnant wages except for the top tier).

As I have noted before, price inflation in essentials hurts the lower income citizenry much harder than the top tier, as essentials make up a much larger percentage of the household expenses. A 30% jump in the cost of gasoline means little to a household in which gasoline accounts for 2% of total net income, but it certainly hurts a household in which gas accounts for 10% of total net income.

As noted in Your Pick, Ben, But One Goes Off the Cliff, the Fed's ZIRP and QE policies have pared future policy down to a stark fork in the road: end ZIRP and QE, and send the risk trade (stocks and commodities) off the cliff, or keep pushing the dollar down and the rising cost of oil will shove the U.S. economy over the cliff.

That would also feed inflation in China, which already threatens to destabilize its economy. Correspondents within China recall that rising inflation was an important (if conveniently forgotten) dynamic in the 1989 era of dissent and disruption. The heavy-handed repression of domestic dissent and foreign reporting is evidence that the leadership in China has a keen appreciation of the connection between instability and rampant inflation.

So why is the Fed carpet-bombing the global economy? To protect the domestic economy? That makes no sense, for the Fed's policies are pushing oil up to the point where there is no way to keep the U.S. economy from tipping into recession. It isn't acting on behalf of the domestic economy, of course; it's acting on behalf of domestic banking and Wall Street.

The Fed is busily destroying the village, suposedly to save it--only it's the global village. But the Fed isn't the only player with a stake in its game, and the other players, notably China, are tipping their hand that they will have to act, and soon, to protect their own domestic economies from the Fed's destructive policies.

Additional note: I have often asked how hyperinflation would benefit the Financial Elites; blogger FOFOA kindly offered a detailed answer.

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SparkyvonBellagio's picture

End the FED permanently!

Send those pricks packing.


"It's what the rich have been doing to the poor since the beginning of time"

TruthInSunshine's picture

People who are aware of the danger represented by The Federal Reserve need new and powerful tools to get the sheeple to understand how they are being ass raped by The Bernank.

The problem of effective communication exists due to the relative complexity by which The Central Banksters operate and obfuscate, and due to the relatively short attention span and low interest in anything economic on the part of the average sheeple.

A placard illustrating The Bernank jamming a $5 per gallon gas pump handle or a $2.99 Green Pepper up the ass of a bent over taxpayer would do wonders in conveying the essentials.

augie's picture

certainly gets the point across. May want to dumb it down just a little more for, you know, EVERYONE!!

Henry Chinaski's picture

$5 gas nostalgia, coming soon to a gas station near you.  bitchez.

When gas broke $1/gal to there was a big scramble to fix the signs made for xx¢/gal. 

Gas stations need to get out in front of it this time. $xx.xx

Spastica Rex's picture

Nah, just drop a zero off the dollar. Everything fixed.

TruthInSunshine's picture

Thanks, WBZ. That's awesome! The "inflation enema" flush is a magical touch, and just redeems your genius.

If I could get everything I ever wanted, it would be an apostrophe followed by a "BITCHEZ!" after 'Enemas.'

If you have time, friend.


How much for an order of bumper stickers and maybe some 24" by 36" posters? These would be amazing to plaster everywhere. What about dubbing in a smiling, contorted, large headed The Bernank as gas station attendant, doing the jamming of the pump handle?

Edit - it's probably best as is. The incorporation of the term 'Bitchez' would scare the sheeple and be lost on the masses as a term of affection in the annals of Zero Hedge.


Stranded Observer's picture

Laughing my ass off!  Well done!

williambanzai7's picture

You can get everything in the shop or you can print it off on your own ;-)

thames222's picture

"Like" this post ;)  where did you find this pic?  I have yet to see $5 in California but I'm sure it will be soon.

akak's picture

I do not have the image posting rights which you posess, but in all fairness and for a truly valid statement, let us see you post the corresponding graphs of total US money supply and the US federal debt.  Not so eager to post those charts, are you?

rocker's picture

Why didn't you go back to the 70's.   Takes on a whole different vibe.  Then compare it to Gold on the same chart.

Silver is still cheap.     And don't forget to overlay Oil on the same chart.  

Soul Train's picture

Question : who recalls the spin that the US government provided for the end of silver currency in '64?

I remember the event well, but can't seem to remember exactly how they broke the news to the sheople?

rocker's picture

Ancient Silver Coins have existed since Caesar and the Roman Empire. Silver still exist. The U.S. Empire is in waiting.

How many can figure out which one survives.  Hint: U.S. status:  "We are Japan now".  This is the End my Friend.   

Thorlyx's picture

He who will not economize will have to agonize.


lolmao500's picture

Heard CNBC say ``Buy silver`` on air... Time to sell!

DoChenRollingBearing's picture

I missed that.  I would wait for more BUY SILVER NOW! ads before I got rid of all of mine.  

Of course with silvers big run-up lately, a switch into gold from silver might be a good idea, I am going to do just that soon.  Some silver.

thames222's picture

It's almost a little late but do it now if you're going to...your gold is going to increase in the next five or so, don't switch--diversify!

Manbarepig's picture

Yes, but was it preceeded by the statement "I don't understand why people..."  ?

SheepDog-One's picture

That was just a sentence fragment, the entire sentence from Burnett was 'Geithner tells me only IDIOTS want to -buy silver-'.

SkySavage's picture

If there is another financial crisis, silver will crash, a la 2008. Now that CNBC is pumping metals, the countdown clock has offically started ticking. Perhaps it is checkmate for the fed this Wednesday?

akak's picture

If there is another financial crisis, silver will crash, a la 2008.

Why do you assume that?

Yes, that does seem to be the spoken and unspoken assumption of almost everyone --- which is why I believe that it is NOT going to happen.  All I see in this assumption are a multitude of generals preparing to fight the last war --- and we all know how well THAT usually works out.  "Maginot Line", anyone?

Soul Train's picture

Akak, in the very short term, one could postulate that on an equity market crash, there will be some investors who need the cash for numerous reasons. And then hysteria would cause others just to cash out while the price drops.

Long term: silver is on the up and up, together with other commodities.

The Fed money cartel is in the corner. How will they get themselves out??? God bless gold and silver.

augie's picture

HAH. Don't believe everything you read she...i mean people. Just look at what our friends from CBS are telling us. All these facts are false but people still think they're true!



Johnny Lawrence's picture

I don't understand why the MSM (and most others for that matter) keeps saying QE2 decreased interest rates.  It did the exact opposite.

YC2's picture

I think this is important to note, and I wouldnt doubt the point was lost on the Fed.  They are smart, they may just be a bit myopic and talk down to the public as a tool.

However, this would be info Im not sure they would gamble on.  They arent traders for sure.

Or they could have seen it the other way, rates went up because the bid they offered was less than expected.

Either way, interesting times..

A Lunatic's picture

And this is a good thing according to them? It seems to me that artificially low interest rates contributed heavily to the regularly scheduled fleecing of the Middle class.

YC2's picture

Yeah, the interest rate is the one place where supposed "capitalists" dont trust the market.  So we are constantly malinvesting or underinvesting based on people who supposedly know better than the market, and control the currency, setting rates.  And this is just a simple assessment of it.  The most emcompassing view is just that it is necessary to maintain the ponzi.


I watched atlas shrugged part 1 with the gf this weekend.  Hard to believe she was pals4eva with central planners like Greenspan.  She is such an absolutist, I imagine there was quite the elephant in the room that had to be talked around.

A Lunatic's picture

And as you may know, Greenspan was one of the biggest proponents of the gold standard ever............until he got the FED job. Hmmmmmmmm..........something about power corrupts and absolute power..........

TruthInSunshine's picture

The Bernank's 'virtuous circle' has turned into a 'vicious circle jerk', with the TBTF ringing the circle, and taxpayers in the center.

The Bernank & Crew are treasonous bastards if there were ever such people in history.

Treat accordingly.


The Ben Bernank says "I am Shiva, destroyer of worlds."

Cassandra Syndrome's picture

This is the best website on the net.

Soul Train's picture

It is the best website on the net, and so far we have the best readers and posters too. Hope we can keep it that way.

It will be fun watching life, as the Federal Reserve self destructs. The tyranny has gone on too long.

Will someone tell me how the Fed money cartel is going to get themselves out of the corner.

Long term - silver is going ever higher. Never know about the short term.

ZeroHedge is the place to be watching it though! No other media in the world does a better job.

Keep up the good work ZH and readers.

Neo-zero's picture

Long term - silver is going ever higher. Never know about the short term.


True dat!  I've been reading about the historical silver/gold ratio and the highest I've heard of was a 17/1 in the 1800's.  Lets say it only gets to 20/1 and gold doesn't move a dollar from this point on, can you say 75$ silver I' know you can.  Question is will we get a pull back or pause to provide some kinda buying point.  I'm thinking not a chance as the Chinese start unwinding their positions.

Neo-zero's picture

Long term - silver is going ever higher. Never know about the short term.


True dat!  I've been reading about the historical silver/gold ratio and the highest I've heard of was a 17/1 in the 1800's.  Lets say it only gets to 20/1 and gold doesn't move a dollar from this point on, can you say 75$ silver I' know you can.  Question is will we get a pull back or pause to provide some kinda buying point.  I'm thinking not a chance as the Chinese start unwinding their positions.

anony's picture

Aside from the negative social effects rising prices have on lower stagnant incomes, it seems right and proper in the natural world that, 1) if one has done the minimum level of striving (whether by choice or because of physical and mental limitations) to earn an income, 2) that that income SHOULD be consumed 100% in providing oneself with that needed to survive: food, drink, clothing, shelter, and TIVO.

Surplus is what is supposed to remain AFTER the basics are taken care of.  Since most of the proletariat do the minimum level to survive, perhaps even less when time goofed off is considered, then heaven forbid that theBernank is right: Food and Energy is where the entire income of the masses should be spent, the effects of rising prices on those items the benchmark for Cost of Living. Not Living and saving.


lolmao500's picture

I really hope Ben does QE3. The US is screwed anyway, better destroy it completly the hyperinflation way.


But since that won't help the elite... that's not what they gonna do. They gonna do a deflation depression so debtors are debt slaves.


So... what should we own for a deflation depression? Not gold or silver, I can tell ya that.

SparkyvonBellagio's picture

I bet the poor are a lot tougher than the rich.

It'll be WAR.


Guess who wins that one?

mach777's picture

FOFOA argues that a hyperinflationary scenario benefits the "elite" more than a dragged out deflationary depression.

He who gets to spend first, spends best.

A Lunatic's picture

I think that all depends on what new social policies one is attempting to instill amongst the masses. Well fed people are hard to corral.

MayIMommaDogFace2theBananaPatch's picture

 They gonna do a deflation depression so debtors are debt slaves.

You might want to look more closely at your assumptions about this relationship.

SheepDog-One's picture

I'd agree, turn silver and gold profits into protection and food. You can eat it.

malek's picture

Another one who doesn't get it, that if you state "They gonna do a deflation depression" you actually believe we will have a (planned, orderly) return to sound money.
Good luck with that hope! You will dearly need it.

russwinter's picture


Corporations and Plutocrats Given a Tax Holiday as US Heads for Fiscal Trainwreck


Printfaster's picture

Clearly you do not understand the impact of taxation.

Taxes are used to discourage activity,for example taxes on liquor, and tobacco.

So if you want to discourage private investment, private economic activity, tax corporations.

In order to distribute jobs more fairly, the government has set up payroll taxation to discourage poeople from working.

Wherever you see taxes, you see discouragement.  What do you want to discourage?

russwinter's picture

Taxes on corporations are the lowest in modern history, and your investment theory isn't working.  That's because taxes this low just encourage gaming and looting.