Guest Post: Austerity And Critical Mass

Tyler Durden's picture

Submitted by Ancient America

Austerity and Critical Mass

Some say that QE3 won’t happen. The U.S. is done with stimulus and force-feeding liquidity and inflation down the world’s throat. Okay, it’s austerity then. How much austerity does anyone think we’re going to have here in America? What is the critical mass and when will we reach it? How much inflation can our creditors handle before they reach their critical mass and have to allow rates to rise? Paradoxically enough, the real question has become ‘can we afford austerity’? I believe the answer is ‘not anymore’. Due to relatively recent events, austerity has become a mathematical impossibility. 

Quantitative easing is not technically “money printing”. However, it did accomplish scaring everyone out of dollars and into “riskier” assets. So, while we didn’t print much, emerging economies certainly did as people ran screaming from the U.S. dollar. The result of which has been rampant inflation all over the developing world and near parabolic gains in commodities and equities. We’re left now with a dangerously deflating economy here in America while our creditors are heavily overheated. Not many people have much confidence in what QE or stimulus have accomplished. Our banks have fresh new reserves they can’t and won’t lend while our employment picture remains increasingly grotesque.

With QE2 ending, negative real interest rates and emerging markets unable to afford more inflation, how does the future look for U.S. government bonds? When rates rise, what of the outlook for equities and for the economy as a whole? If the economy stalls and people want to hold onto their precious cash, business will suffer and who will fund our local, state and federal governments? If our government programs can’t function, and people start to worry about their grandmothers, their pensions and their grandmothers pension, what will happen? Austerity? Not over our Masters of Debt’s (MOD’S) dead bodies! But when will we reach critical mass?

Why will congress and the fed absolutely intervene? When you figure it out, it seems almost comical to have ever believed otherwise. Simply put, that’s their nature. Nowadays, it’s what they are designed to do. Given current events, they truly have no choice whatsoever. Did Volcker raise rates way back when? Yes. Are they sort of attempting austerity all over the world? Well, kinda.  But that’s not what’s  happening here and now. It won’t happen...not for long. Tightening might come from the emerging markets, but not from us. Just as credit card addicts rarely cut themselves off, we’d sooner end this easy money regime as collectively give up cheap oil. In severe debt situations,  the creditors usually do the tightening, not the debtors. What environment will that conflict produce? When congress and the fed stimulate, ease and shuffle around assets and liabilities in a compounding vortex of fear and arrogance, how will our creditors react when they don’t have a choice anymore?

The first point of critical mass will be when the austerity is no longer tolerable for the government. The second is when emerging markets are forced to let their currencies appreciate. The critical question is whether this can occur in an orderly fashion or not? I think not. Our economy is so over-leveraged that austerity simply isn’t an option. There was a tipping point where the cost of providing tolerable austerity became too expensive for the world to afford. That is the main concept to understand. The bizarre fact is that we couldn’t financially achieve a hard money stance if we tried. Unfortunately, this is a somewhat recent development.

The fed’s dual mandate of stable prices and maximum employment is impossibly vague and ridiculous. What are prices? What is employment? Who’s prices and what work? Defining either requires shoving a qualitative square peg into a quantitative round hole. This is why no one believes in any of the models that the fed uses. Metrics such as the CPI, PPI and BLS numbers are useful tools but create a disconnect when applied to “monetary policy”. Fiscal policy has the same fallacy built into it. However, unleashing free market forces upon interest rates currency valuations would mean a complete restructuring of the global economic matrix.

If the fed lets raise rates, payments become too onerous for everybody here. If they continue buying treasuries, emerging markets get inflation and we all get asset bubbles. These inflated economies cannot allow us to do that but if rates rise too quickly emerging markets immediately lose their biggest customer without a significant consumer base established in their own countries. Therefore, QE3 will look very different than QE2. In reality, there are all kinds of back door attempts at stimulus being performed right now. These have been well documented by many pros such as Meredith Whitney, Bill Gross and Zerohedge.

The real issue here is public opinion. Obviously, the giant auction house that is our global market place is an organic amalgam of emotional organisms clawing at each other for some profits. People dictate policy, not economic models and while Bernanke may believe that a stronger CPI and 9% unemployment means one thing, it actually means another thing. The more people hear about the CPI and unemployment data, the angrier they get and the stronger their stance gets against austerity. However, everyone is concerned about debt. America is awash in it. Some believe that we aren’t at a breaking point and that we can mathematically sustain another 5-10 trillion dollars in debt. Whether that is true or not, public opinion is that our national and consumer debt is a ticking time bomb. So, which will prove the greater inertia; fear of a national, possibly global debt explosion or fear of austerity and deflation. Many could stop reading this right now as I believe the answer is inherently undeniable. However, I will continue briefly.

The elite hedge fund managers, bankers and policy makers have the ability to profit in any environment. Whatever combination of inflation, deflation or hyper-reinflationary price deinstagflation we get, they are positioned to prosper. However, because of capital flows and velocity, inflation benefits them the most simply because they get to use the money first. The argument that inflation harms big financial institutions balance sheets and that they would benefit from higher interest rates is incorrect. Deflation slowly kills their balance while inflation gives them a flow advantage. This being said, they aren’t the only game in town.

If congress and the fed were to enforce austerity, the outcome would be unpredictable to say the least. When and how would we  reemerge after a decade of gut wrenching deflation? Is it not possible that given the choice, many citizens might willfully opt for hyperinflation? I could see many possibilities in which hyperinflation would actually be better for a lot of folks. Hyperinflation is only one possibility anyway. We could have a Japanese style deflation inflation cycle for twenty years. I think that’s doubtful given the compounding black hole of debt and the public opinion regarding it, but Mish thinks it’s likely and I like Mish. In any event, the unpredictability of a hard money policy juxtaposed with that of an easy policy definitely favors the likelihood of the latter. When any attempt at austerity reaches the point of critical mass where the pain of a credit crunch overtakes the fear of hyperinflation, get ready.

In conclusion, when esoteric conjecture hits the cold hard wall of human suffering, emotion always wins. Austerity is mathematically impossible given that no one at the top benefits from it and no one at the bottom can psychologically bear it. Emerging markets may try to force rates higher, but only as much as its benefits outweigh its harm. In the end, organic responses will rule the day and the over-leveraged nature of our global economic environment ensures that the cheap money spigot cannot be closed without a complete restructuring. So, get ready for a transitory bout of tightening followed by a continuation of U.S. currency debasement and asset bubble formation.

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legal eagle's picture

How about this, austerity for the rest of the world - cut our foreign aid in half.  Another light bulb, bring our troops home and end the madness.  Yeah, that's the ticket....

BigJim's picture

Cutting our foreign aid means cutting our control over the foreign satraps who receive it.

It WILL happen, eventually, but not by our 'leader's' choice.... we'll just wake up to a morning one day when everyone has realised there's no money.

desgust's picture

Foreign aid!!! HaHaHa!

You are an idiot! Except Israel who receives "foreign aid"?

Go make your homework, moron!

Holodomor2012's picture

It has been argued that much of our aid to ME nations "other than Israel" is actually still done to support Israel.  That census link shows Egypt, Iraq and Afghanistan among some of the higher recipients.

legal eagle's picture

No substance, no citations, just name calling.  Sounds impotent to me.

LFMayor's picture

Okay desgust, it won't bother you in the slightest if it is cut then.  Remind us of this when the starving masses are pouring over your borders, like two legged locusts.

we should weaponize the food.  Make those ingrates dance for their suppers. That, or convert those hills of corn (so fucking much we have to store it on the ground here, under tarps) to ethanol, drink it and burn it in our cars.

I've mentioned it here before, but in case you're new... did you know we actually make kitty litter out of whole kernel corn?  That's right, so those pampered, free loading ass-lickers can shit all over it at their pleasure. 
We have so much damn food that all but waste it.

Cut it off, no exports,  then we'll see what the market rate is for a litter box full of used corn after a week. 

Make Uncle Sam take a pull at that little brown jug marked "bad".  You've all forgotten what a son of bitchin mean drunk he really is, haven't you?

BooMushroom's picture

I figured you HAD to be full of shit on this one.  Kitty litter from corn?  No way!

But it's true :(

From their page: 


World's Best Cat Litter™ isn't made from mined, drilled, or artificially made ingredients. It's milled from renewable whole-kernel corn and is biodegradable.1And because it disperses in water, it's also septic-safe and flushable!2

Yeah, we're screwed.

jus_lite_reading's picture

Look at whats going on in spain today!!!

smlbizman's picture

i cant afford another light bulb at 50. a pop

Aquiloaster's picture

United States Agency for International Development (USAID)'s budget is less than .25% of the national budget. So you are proposing reducing spending by .012% (about a tenth of a penny on a dollar). How did correctly complete the math question required to post that dumbass comment?

legal eagle's picture

I never said it would solve any of our hefty problems, only that by logical necessity reducing foreign aid is austerity - for them.  So, you are the dumbass for imputing a conclusion I did not state and then refuting it.  That, my friend is called masterbation.

Aquiloaster's picture

You never said it because your comment trailed off into an ellipsis, rather than saying what 'that' is a 'ticket' to. Ellipses...are easy to type with only one hand free...

legal eagle's picture

You are a dysfunctional narcissist.  You bend reality to suit your needs just like Bernake.

Absinthe Minded's picture

It doesn't sound like much does it, .012%. Oh yeah, the national budget is $4,700,000,000,000. That comes to $564 million. That's chump change. In fact why don't you pay for it out of your pocket money. Seeing as we give Pakistan alone $2 billion a year I'd say your statistics might be off a little. With this kind of thinking it's no wonder our debt is at $14T and climbing.

earnulf's picture

First off, the budget is 3.7 Trillion, not 4.7.    Second your computations are off by at least a decimal point and most likely two as State and other international programs was 49.8 Billion in 2010 (CBO Table S-11, 2011 Budget)    Multiplying 3.7 Tril by .012 renders about 44 billion, not 564 million.

pasttense's picture

US AID is a small percent of our foreign aid. Most of it is military aid.

AnAnonymous's picture

How about this, austerity for the rest of the world - cut our foreign aid in half.  Another light bulb, bring our troops home and end the madness.  Yeah, that's the ticket....


How is that strange? It is classical to an extortion scheme. The extorter tries to fasten the extorted's belt as much as possible to better the day. That is indeed the ticket.

But the numbers show that not that much is to be recouped, than it wont bring that much more to the US table.

The current situation is plain to see: exhaustion of the extortion scheme. The US has saturated the world and there is not that much left to be extracted from the exterior to the US.

Lets Hang Parliament's picture

Austerity is mathematically impossible

Complacency rules yet again...

Imminent Collapse's picture

The question is not whether we can afford austerity, but can we afford not to have austerity.  More to the point, we won't be asked. 

It is coming, bitchez!

Hugh G Rection's picture



They're already coming after the pensions, public or otherwise.  The morons on the left are being told we need to tax more, the morons on the right are being told we need to go after unions.


How about the bankster elites and the corporate oligarchs that pay nearly 0% tax.


Guillotines Bitchezz!

JW n FL's picture

when the debt ceiling is not raised.. that is forced austerity.. upon the poor..


it's all good.. when the poor start burning shit down in your neighborhood.. or when the poor snipe you from your own back yard because they are hungry and you have a nice house with the Bar-B-Que running!


No worries! You want Austerity! and here it comes! and that will be the end of some of you at the least! better hope the U.S. Army Troops can make it to your house before the Hungry Poor do!


Force Majeure' Austerity! which is incorrect because anyone with a brain knows that hungry poor people will act a certain way.. so it really cannot be considered an “Act of God” because this behavior of Austerity will bring about a premeditated response from the hoards! The hoards may not know what they will do, but we know what they will do.. and since we allow the Forced Austerity, we bring the end results upon ourselves!


Got Ammo Bitchez?


centerline's picture

Its a catch-22 for sure.  Either way, those most dependant on the system are the ones in line to lose the most.  Sick and hungry is the coming new normal for many.  You are right on.  And it is already happen, allbeit a lesser scale.  Whoever junked your post is an idiot... make that 2 idiots.


JW n FL's picture

Thanks Bro..

the thing that really pisses me off.. and maybe the junks get some over flow of the anger.. is!


1%.. Less than 1% of what has been printed was used to help those who need it.. less than 1-fucking-%!

$30 PLUS Trillion Fucking Dollars! and Nothing goes to Americans who need help!

I pay Taxes.. I want my Taxes to help My Fellow Americans and I dont fucking mean more Wall Street Welfare Subsidies!

I want my Taxes to help people who are in Need! My fellow Americans who need a Hand! in this Government Debacle fueled by Lobby Dollars!

I want real people to have real help!

I dont want Corporations getting help when they dont do shit to deserve it or put the monies back to work to the benefit of the Country! Fuck them!

$30 Fucking Trillion Dollars was fucking printed and less than 1 fuckign % went to help the people! Fuck the Government Lobby Whores and Fuck Wall Street for bribing them ALL!

StychoKiller's picture

Better that you should hang onto those clownbux yourself and donate them to charities of YOUR choice, rather than allowing the Govt to give it to "charities" of their choice!

Pool Shark's picture


Make that 3 idiots...


oogs66's picture

Sadly I believe you are correct, that we will prime the pump until it explodes because austerity is too painful for politicians to deal with

dmger14's picture

Absolutely true.  Anyone who believes we will have protracted and deep deflation underestimates human nature.

Hugh_Jorgan's picture

I fully agree that the Fed will prime and prime, but just like a junkie and his smack it will require moreand more junk and give less and less effect. We already have the beginning of protracted deflation, and further deflation is guaranteed in my mind.

For all they have spent, we haven't even been able to keep economic output on an even keel much less show any growth. Plus, the results we have seen in the last 2 years is with the economy holding its breath, treading water hoping that things will turn around. I don't see any turnaround for at least 10 years, economic and geo-political events will ensure this.

So, at some point there is another collective shoe that will drop as the US economy "capitulates". That will put us into a deflationary pit that no amount of priming will ever stimulate us out of and the act of trying will bring runaway hyperinflation. This will be much worse than any austerity measures could ever be. Hyperinflation hurts all but the uber-rich, where auterity only hurts the poor and the entitlement classes. (Although, BHO and Co. are working overtime to expand the entitlement class because they think it will keep them in power and will foment a crisis that they can solve with radical changes to governance in the USA. Seems like that plan might be working, eh?)


TruthInSunshine's picture

QEx is already here. It's ZIRP for as long as The Bernank doesn't get mutinized (and not by other Fed Board Members, either, who will never mount an insurrection - it will be by Congressional Incumbents, prodded to throw their hands up by senior citizens, the most fearsome voting block in history).

So, ZIRP is all Ben's got left.

Until that can't be maintained, which might be already sooner rather than later.

Austerity? Austerity can't happen, you say?

We'll all see it.

The reality is that QE3 or QEx, involving anything remotely close to past iterations, will only exacerbate the problems confronting The Bernank, and further, it will actually hurt Wall Street (and I do think the reality is that retailers are already screaming at the Fed and Congress behind closed doors, and that no one can deny that the U.S. and Europe are just too damn big on the consumption scale to be able to sacrifice on the altar of continued levels of inflation without Wall Street getting what someone else referred to as "boomeranged") - on sentence.

Bernank can't merely kick the can, again. There's a giant and sturdy wall at the end of the road he's come to.

When you get to the fork in the road, take it, Bernankincide.

The race to save the day is a slow simmer, and this boiling pace The Bernank has created has already dug his grave. Ben Bernanke is already a casualty, and he even probably knows it.

Cue massive campaign year theatrics and a big USD rally soon.

And cue Bernank's replacement. He wants to spend more time with the family, or teach again, or, whatever.

dizzyfingers's picture




alexanderstollznow's picture

no, QEx is not here, and no changing the definition of QE will change the fact that, contrary to the views vociferously expressed on certain discussion forums, QEx is not likely at all, let alone anytime soon.

Jonas Parker's picture

TEACH? No, he wants to get to somewhere far, far away before being "Ceausescu'ed" by the American people.

imapopulistnow's picture

A Japanese style deflation inflation cycle for twenty years is perhaps the best case scenario that we are facing.  Both alternatives that you wrote of would be a disaster.  I can only hope our policy makers don't screw it up by going too far in either direction (hyperinflation or austerity)

TheTmfreak's picture

They set sail in the extremes awhile back now.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

What austerity measures is the privately held Federal Reserve willing to take in this scenario?  That's what I thought.  None!


Yes, they will print the money.  Death of the addict by overdose as opposed to withdrawal but death just the same!


Tuco Benedicto Pacifico Juan Ramirez

TruthInSunshine's picture

The irony of fractional reserve banksters having to do the opposite of what they desire to do with every fiber of their being and existence will be incredible to see, as it will be the only way to temporarily save their entire dogma, if that is at least one of their important goals (i.e. self-survival).

Korrath's picture

You wrote a decent rebuttal, but I still have an incredibly hard time believing that TPTB are going to allow the economy to slide backward into a sinking deflationary cycle which can only end in The Great Depression part the year before a major election.

Oh regional Indian's picture


COnsider the possibility that there may be no major election in 2012.


MrSteve's picture

ORI, consider that during the 4 year Civil War in the USA which killed 600,000 people, the US held elections. No mater what happens, people will go to the polls to choose representatives and a President. Without elections, the government will have ZERO legitimacy, regardless of your opinion about it now.

KickIce's picture

Take freedom for granted much?

Green Leader's picture

I am not expecting elections in 2012--as that is part of the plan...

TruthInSunshine's picture

Guys, I'm as cynical as one can be about the true goals of those in power, including our very own (or not, as it is not part of our government, but a proxy organization that is more quasi-governmental, if just a little, when it claims it is - but I digress) Federal Reserve.

However, the math is the math, and that's the fly in the Bernank's ointment.

Whether those who claim QE as we now know it, in form and size, will effectively end, are correct or not, we do have some empirical data proving that it really was a net loser of a program, and implementing it thus far has probably severely damaged the real economy, and thwarted any organic recovery.

History would be kind to call QE a failure, when it's recorded in the books and expounded upon, IMO.

It may wind up as a case book example of what not to do for future students of economics.

buzzsaw99's picture

Austerity will never apply to Wall Street.

Shell Game's picture

Agreed. But more importantly, austerity will never apply to city, state or government 'leaders'.

LawsofPhysics's picture

Haircuts all around eventually.  Got something physical to offer or exchange for the fiat du jour and/or the things you will need to survive?  Where are we all heading?  Think of what Russia went through after the fall of communism in the late 80's and throughout the 90's.  America is coming to the same conclusion (with similar racial and state's rights issues - will state leave the union?  maybe) just coming at it from a much steeper angle. 

TruthInSunshine's picture
Think about these two 'proclamations,' regardless as to whether you believe the assertion, and why they are being asserted.