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Guest Post: Currency Wars: RIP Shadow Banking System, Long Live QEx!

Tyler Durden's picture


Submitted by Gordon T. Long of Tipping Points

RIP Shadow Banking System - Long Live QEX

We have unwittingly become trapped in the snarled net of years of bad Public Policy. Like corporations that look no further than this quarter's results, our politicos never stop campaigning to start the tough task of ruling responsibly. A winning election simply represents 'rewards' and 'spoils' to all before quickly resuming the next campaign. 

Image has become reality!

As a result the never ending political pandering has led to false expectations, undeliverable entitlements and false optimism in the electorate that rejects the immediate and obvious realities. 

The result of a degenerated political leadership process is we are on the brink of a massive and sudden reduction in the US standard of living.


In 1971 President Richard Nixon rather than face the harsh realities of excessive US military spending, took the US dollar and the world Reserve Currency off the Gold Standard. It unleashed the greatest global debt pyramiding scheme the world has ever seen - or ever will see again.

To ensure all our readers truly appreciate what this decision meant and where we stand today, we need to revisit some basics.

First, in a the fractional reserve banking system which we currently operate under, money can only be borrowed into existence. Currency can be printed but the money supply only grows when debt is actually created. When the US Treasury issues bonds (debt) and it is taken on the Federal Reserve books as an asset, magically money is brought into existence via the issue of currency (or bank deposit) to the US Treasury. This is why the US dollar is a Federal Reserve note. It is an IOU to the Federal Reserve.

Secondly, Inflation is first and always a result of Monetary policy. If more money is put into the economy we will have more money chasing the same number of goods and  it results in price inflation. 

Thirdly, for an economy measured by GDP to grow, the money supply must grow faster than GDP or the economy will be starved of liquidity. If more money is created for economic growth and it consequentially produces inflation, then the money supply must maintain its growth at a faster pace than inflation. This is one of the reasons why when the inflation genie is released it is so hard to get 'back into the bottle' and to contain it. We learned this difficult lesson in the 1970's for those old enough to remember.

In theory therefore:

Money Supply Growth must be > Growth of the Economy

Since Money can only be loaned into existence and inflation is a Monetary phenomena

Money Supply must be larger > Inflation

Inflation must be larger  > Real Growth (NOMINAL GROWTH MINUS INFLATION)

In a theoretical CLOSED economy there must always be a level of money growth which is slightly larger than inflation which is slightly larger than REAL economic growth.

Healthy Economy - Examples

4% GDP Growth with 5% Inflation means Money Growth is larger than 5% with a -1% Real Growth
6% GDP Growth with 7% Inflation means Money Growth is larger than 7% with a -1% Real Growth
9% GDP Growth with 10% Inflation means Money Growth is larger than 10% with a -1% Real Growth
Therefore you can see REAL Growth must always be zero or negative.

It Is Money CREATION that correlates with the growth of the NOMINAL value of the market

Unhealthy Economy - Examples

2% GDP Growth with 3% Inflation means Money Growth is larger than 3% with a -1% Real Growth
0% GDP Growth with 1% Inflation means Money Growth is larger than 1% with a -1% Real Growth
-2% GDP Growth with 0% Inflation means Money Growth is larger than 0% with a -2% Real Growth

Broken Economy - Examples

2% GDP Growth with 3% DEFLATION means Money Growth is larger than 1% with a +1% Real Growth
0% GDP Growth with 3% DEFLATION means Money Growth is larger than 3% with a +3% Real Growth
-2% GDP Growth with 3% DEFLATION means Money Growth is larger than +1% with a +1% Real Growth
-2% GDP Growth with 5% DEFLATION means Money Growth is larger than +3% with a +3% Real Growth

Therefore you can see Real Growth is always positive

Therefore when you have no growth and DEFLATION (due to deleveraging, malinvestment, default, bankruptcy) you still must have Money Growth. This forces the Fed to print it into existance or the government to take on the debt to grow the money supply or we have a liquidity trap.

To appreciate this fact you must remember that interest on outstanding debt STILL compounds every year.

The economy may stop growing but the carrying cost of outstanding debt doesn't.

The Federal Reserve in essence must make sure that DEFLATION is absorbed by adding money or the debt payments will shrink the economy

(Note: It is argued that it is actually the first derivative or rate of change of the increases/ decreases above, not the actual rate, that must be maintained. Even if this is true, the sign doesn't change which is the important point here.)

The major issue arises when even by increasing debt (somehow) it no longer generates growth.

This happens when we arrive at the consequential point of Debt Saturation relative to economic growth.



1- Debt growth now takes away from growth

2- Since the US is not a CLOSED economy and in fact is the world's reserve currency, money created by the Fed does not necessarily stay in the US.

In fact Quantitative Easing has presently ignited a massive global US dollar carry trade.

To put the above into perspective we need to understand that Money or more specifically Credit prior to 2008 had been growing not just through the banking system regulated by bank regulators but rather through what is referred to as the Shadow Banking System.

The Shadow Banking System as the prime pusher of toxic debt instruments collapsed in the 2008 financial crisis and so far it simply has not re-emerged in some sort of hybrid fashion.  The Federal Reserve desperately needs this to happen and this has been another reason for the Fed's "Extend & Pretend" policy. Extend & Pretend was not only to give the economy time to rebound and push asset prices up (helping book collateral values), but also to allow asset appreciate to re-ignite a new and improved Shadow Banking System. It simply is not happening fast enough.

Here is the latest figures from the Federal Reserve's Flow of Funds report for Q4 2010. The report was startling since Q3 2010 was even worse than thought after final adjustments were made.

We had aQ4 2010 decline of $206.4 Billion in Shadow Banking liabilities with $440 Billion in combined Shadow and Conventional Banking System Liabilities.

This almost guarantees that the Federal Reserve must continue QEX.



It will take too much printed money by the Fed, created so fast, that the collateral fallout damage would be economically fatal.

Even the TRADITIONAL Banking System is shrinking on a M3 basis (it is no longer reported)


The collapse of the Shadow Banking is not resulting in the degree of asset deflation you might expect because the assets deflating are what has been referred to as toxic debt. The underlying basis for these instruments is real estate which is correspondingly being stopped from collapsing by the halting of Mark-to Market and other Fed sanctioned accounting gimmickry. Meanwhile the offsetting Money creation by the Fed is flowing into equities and bonds. This is creating the asset inflation that the Fed wants and needs.

A major problem for the Fed is not just being able to generate the amount required to offset the Shadow Banking System erosion, but also the rate at which the it can realistically make this happen. The Fed needs to buy more time.

Unfortunately there are other major problems that are boxing them in.


Global growth has been pushed to the level of a desperate high octane race as a result of one bad public policy after another.

Exponential money growth has resulted in excess global capacity, underutilized production capabilities and unprecedented levels of mal-investment.

Everything that even hints at a slowdown or problem has continuously been met with rapid additional money supply expansion. The result is a global economy that can no longer absorb new debt at the same or faster rate and is burdened with existing debt payments that are simply  not fundable without ever shrinking interest rates or easy roll-over banking covenants.

At nearly zero interest rates and slowing growth we have a potent cocktail for an economic disaster.


We additionally have a global crisis of job growth to match population employment needs.

Schumpeter's creative destruction is operating at full throttle with the internet and Information Technologies continuously obsolescing untold jobs worldwide.

Manufacturing through major process changes, supply chain integration and robotic automation has reinvented itself over the last 15 years. Gone are the days of thousands of factories employing thousands of people. Today it is hundreds of factories employing hundreds of people with thousands wanting to work there.

Yes China was the recipient of many of the 46,000 factories that left America but they employ much fewer people than they did when they were in the US.  China has 30 million people a year leaving the rural farmland looking for factory work. India, Malaysia, Indonesia, etc face similar problems. There are not enough new factories needed to fill this requirement. This is deflationary in nature until the base commodity increases of manufacturing outstrip labor and capital cost savings.

New technology companies like Bio-Tech employ one tenth to one hundredth the employees that were employed during the computer communications technology era of the 80's and 90's. Higher education is required in these new industries and there is a much higher number of Master and PhD workers. However, the growing numbers of thousands of students with advanced degrees can't all be jammed into these too few corporations.

Unemployment is elevated and growing everywhere with more and more higher educated youth unable to find appropriate work. Sovereign nations globally face the daunting challenge of achieving employment levels that will stop social unrest. Some as we are witnessing in North Africa and the Middle East with 15- 30% unemployment are failing to do so.


To say we have a looming global resource scarcity issue seems obvious, however I seldom ever read that we do? We see prices in all commodities continuously rising, food of all types rising, energy of all crack levels rising; yet no one talks about the realities of a systemic long term problem.

Shortages are always regarded as a temporary disruption or associated with some special situation. Folks, I hate to break the news but we are on the verge of major global resource shortages and scarcity. When Americans understand it is not their inalienable right to have gas at $3 per gallon while everyone else pays $9 they will quickly get the message. That day is fast approaching.

We will soon be in an era of worrying about how we pay for what we NEED versus how we can afford what we WANT.


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Thu, 03/17/2011 - 17:56 | 1068525 traderjoe
traderjoe's picture

Chart-porn - Bitchez!

Bank Holiday in 3...2...1...

Thu, 03/17/2011 - 18:19 | 1068626 IQ 145
IQ 145's picture

 Absolutely beautiful article. If Zero Hedge never did anything else at all; this would secure them a place as an important and meaningfull resource on the internet. The First chart is a real beauty. 

Thu, 03/17/2011 - 18:30 | 1068668 Sudden Debt
Sudden Debt's picture

this evening I gave a brilliant presentation about our economic future with 95% of stuff that I've taken from ZH.

I've really scared the shit out of people this evening and I've got the best questions ever: WHAT CAN WE DO!

My answer: Cut costs to the bone and if need cut the bone and hoard commodities.

I've got 9 meeting request when I left home and a invitation to give a presentation at the biggest entrepeneural network in my country.


Thu, 03/17/2011 - 18:35 | 1068702 IQ 145
IQ 145's picture

 I understand; but this article is outstanding. bookmarking the website on both browsers. The guy can speak english in whole sentences and he understands what's going on; purrr-fect.

Thu, 03/17/2011 - 19:08 | 1068909 Hacked Economy
Hacked Economy's picture

I've given lectures and classes on this very stuff for a while, specifically "cranking up" the frequency since December.  I haven't used much info from ZH in my discussions and articles (yet), but I've been gleaning quite a bit of useful tidbits that corroborate what I already have.  And just like you, Sudden, the people I speak with are aghast once the "aha!" light comes on in their heads.  They begin seeing the world around them in a different, more truthful way than ever before, and they're full of questions of what they should do to prepare for what's coming down the economic pike.

Thu, 03/17/2011 - 22:04 | 1069660 New_Meat
New_Meat's picture

Your answer==Cal Coolidge's answer in U.S. 1920-21-22 situation. - Ned

Fri, 03/18/2011 - 00:30 | 1070072 LMAOLORI
LMAOLORI's picture

As Bob Murphy says "More generally, "disrespectful-punk" websites catering to financial readers, epitomized byZeroHedge and EconomicPolicyJournal, take it as a matter of course that Bernanke has no clothes. The anonymity of the Internet ensures that plenty of respectable Wall Street pros turn to these alternative media to get the real news about the economy — when their boss isn't looking, of course."

Thu, 03/17/2011 - 21:11 | 1069436 Golden monkey
Golden monkey's picture

Very old, extremely smart gentleman.

Will leave us when capitalism crash?


Thu, 03/17/2011 - 18:49 | 1068786 michael.suede
michael.suede's picture

I disagree with this whole liquidity trap nonsense and the idea that the central bank has to print money or we will run out of it in a deflationary scenario.

There is never too "little" money and deflation is a good thing for savers.

Such notions are Keynesian nonsense.  Prices will adjust downward proportionate to the amount of debt that is liquidated and they will eventually stabilize once all of the bad debt is gone.

Bankruptcy is the slavation of the economy.

Thu, 03/17/2011 - 19:38 | 1069052 stollcri
stollcri's picture

You might be technically correct, but there might be some problems holding society together under your scenario.

Consider that I have a mortgage that is well within my budget given my income, but after a certain amount of wage deflation the monthly payments may no longer be affordable. Should I have saved my money to buy my house like my grandfather did? Maybe so, but that wasn't the social contract at the time of my purchase decision.

Younger people would get screwed more in your scenario simply because they have not had the same amount of time to accumulate savings (and the prevailing social contract told them to take on debt that is exempt from bankruptcy to go to college to get the good paying job). I think that is part of the problem in MENA, no?

Thu, 03/17/2011 - 23:13 | 1069884 Slim
Slim's picture

You may disagree with it but this fits with what is experienced in credit crisis/financial collapse.  When velocity goes to zero and you wind up in a debt deflationary spiral, have to push people to invest/do something otherwise everyone keeps going to cash and a fractional reserve system blows appart as everyone simultaneously deleverages the economy as they unwind it to get to cash.  There is a reason they say that the Fed is pathologically afraid of deflation and this is it.  This is what made the Great Depression so bad when they bombed out the banks and were on the gold standard (which they then defaulted on in 1933 so it is no panacea or guarantee that bad things can't happen).


Of course when you look at all the money wiped out by the shadow bank collapse, people would have a hard time justifying a higher price of gold/silver today vs. 2006 on money supply alone (certainly risk premium would figure).  My sense is that a lot of people don't like to talk about this but really this is the issue with gold right now.  If you look at M1 growth, you better buy gold.  If you look at M3 or the net damage to total money supply spun up via velocity and out in the should be down heavily (ex risk premium) and no where near where it is today.  This is the real issue here with gold/inflation/money supply and its odd that it isn't discussed more on this site regardless of which side certain people may be on in the argument.  Actually the fact that it never gets mentioned makes me a little suspicious of motivations.

Thu, 03/17/2011 - 17:56 | 1068530 cossack55
cossack55's picture

Tipping Point my ass. I'm already upside down.

Thu, 03/17/2011 - 18:15 | 1068600 umop episdn
umop episdn's picture

Me too.  ;)

"Nixon...took the US dollar and the world Reserve Currency off the Gold Standard. It unleashed the greatest global debt pyramiding scheme the world has ever seen - or ever will see again."

This is likely true, but Einstein once said that only two things were infinite, the universe and human stupidity; but he wasn't sure about the former.

Thu, 03/17/2011 - 18:36 | 1068712 IQ 145
IQ 145's picture

 I've been telling people this exact statement for thirty years, but I had to quit; because people look at me like I was just let off by an alien spaceship.

Thu, 03/17/2011 - 17:59 | 1068536 Oracle of Kypseli
Oracle of Kypseli's picture

Yes. But, it takes too long to travel to infinity. Too far.

Thu, 03/17/2011 - 18:50 | 1068777 dearth vader
dearth vader's picture

Imagine, you're part of infinity already.

It's all in the mind, dear.

Thu, 03/17/2011 - 19:00 | 1068854 bbaez
bbaez's picture

Infinity and beyond baby

Thu, 03/17/2011 - 18:01 | 1068543 Spalding_Smailes
Spalding_Smailes's picture

Warnings Aplenty From the 'Father' of Securitization

In his first television interview ever, Lew Ranieri did not disappoint. In a candid interview, the "father" of the mortgage-backed security offered important insights on the state of the housing market and the market for securitized commercial mortgages, while also proving willing to accept criticism of the industry he helped to create.

(Lew Ranieri is known as the "father of securitization" because he helped invent the securitized mortgage in 1977 while working for Salomon Brothers. He's even been credited with inventing the word "securitization.")

Thu, 03/17/2011 - 18:02 | 1068547 DrStrangelove
DrStrangelove's picture

Infinity is just the beginning

Thu, 03/17/2011 - 18:13 | 1068555 TruthInSunshine
TruthInSunshine's picture

The collapse of the Shadow Banking is not resulting in the degree of asset deflation you might expect because the assets deflating are what has been referred to as toxic debt. The underlying basis for these instruments is real estate which is correspondingly being stopped from collapsing by the halting of Mark-to Market and other Fed sanctioned accounting gimmickry. Meanwhile the offsetting Money creation by the Fed is flowing into equities and bonds. This is creating the asset inflation that the Fed wants and needs. A major problem for the Fed is not just being able to generate the amount required to offset the Shadow Banking System erosion, but also the rate at which the it can realistically make this happen. The Fed needs to buy more time. Unfortunately there are other major problems that are boxing them in.



Great, great selection of analysis - there.


We're NO WHERE near done deleveraging. Aside from losing a good chunk of its middle class in this rip-your-face-off downturn, the other problem that the nation as a whole faces is that whatever potential for planting the seeds of any recovery there are, government is colluding with the elite in alleged 'private' enterprise to ensure those seeds never grow on U.S. soil - these are now saplings in Mexico & China, soon to be mighty oaks.

We're back in a bubble mentality where people think Apple, Groupon and Facebook will save us, when Apple has 90 employees in China for every 4 they have in the U.S., and companies like Groupon and Facebook aren't and will never be large scale employers, never mind that Groupon and Facebook have shaky business models and they lack proprietary underpinnings (so they're not even guaranteed a long life).


Thu, 03/17/2011 - 18:06 | 1068560 DrStrangelove
DrStrangelove's picture

the population growth chart might not have been expected to look like that in 1000A.D.

Thu, 03/17/2011 - 18:53 | 1068805 dearth vader
dearth vader's picture

Nevertheless, they were in overshoot, even in those days.

Lack of energy from fossil fuels!

Thu, 03/17/2011 - 18:07 | 1068562 plocequ1
plocequ1's picture

Who cares. I always hated money anyway. Its dirty

Thu, 03/17/2011 - 18:09 | 1068577 Jean Lazard de ...
Jean Lazard de Rotschild's picture

then money laundering would come in handy for you... lol

Thu, 03/17/2011 - 18:10 | 1068579 mynhair
mynhair's picture

But it has copious quantities of Sheen residue....

Thu, 03/17/2011 - 18:44 | 1068760 Jean Lazard de ...
Jean Lazard de Rotschild's picture

and? that´s WINNING

Thu, 03/17/2011 - 19:02 | 1068870 bbaez
bbaez's picture

Tiger Blood and Sheenacine

Thu, 03/17/2011 - 18:10 | 1068576 Bearster
Bearster's picture

If I were as confused as Gordon T. Long, I would not be writing about economics but frantically studying it remedially.


"...the US dollar is a Federal Reserve note. It is an IOU to the Federal Reserve."

It is a liability of the Fed, not an asset of the Fed.  The possessor of the FRN does not owe anything to the Fed; the Fed owes him something.

The FRN is irredeemable, but still one should be clear on this distinction (and many other erroneous notions in this article)!

Thu, 03/17/2011 - 18:19 | 1068604 TruthInSunshine
TruthInSunshine's picture

The FRN is an asset of the holder, and a liability of the taxpayer, if one wished to be technical.

But I won't mention that in reality, due to the incredible distortions of Modern Money Mechanics (the playbook for both the London Central Bank & Federal Reserve Bank), what we count as an asset (the FRN) is really not what we intuitively believe it is - because to do so would be to digress.

Thu, 03/17/2011 - 18:19 | 1068628 Bearster
Bearster's picture

Actually ... to be technical, the Treasury Bond is the liability of the taxpayer.  The Fed is, by a convenient fiction everyone pretends to believe in, a separate entity with a separate balance sheet.  That way the mutual check kiting scheme (aka "69") between the Fed and the Treasury does not appear to be mere masturbation, but something more...

Thu, 03/17/2011 - 18:25 | 1068653 TruthInSunshine
TruthInSunshine's picture

While I agree with you, I hasten to add that both each FRN and Treasury Bonds are liabilities.

I agree that it's only through collusion between the Fed and the Treasury that our system can now operate.

Thu, 03/17/2011 - 18:37 | 1068719 Sean7k
Sean7k's picture

The FRN is not a liability of the FED, it is a liability of the Treasury department and by extension the taxpayer. Treasury issues bonds and notes and in return, receives FRN's and credit notations. 

FRN's are a monetary instrument, being a liability and an asset, depending on how you are using it. For those holding the bonds, it is an asset. For the taxpayer, it is a liability, thus the national debt interest payments.


Fri, 03/18/2011 - 22:42 | 1074287 benbushiii
benbushiii's picture

It is a liability of the Fed, not an asset of the Fed.  The possessor of the FRN does not owe anything to the Fed; the Fed owes him something.


Actually, this is where the problem with the Bernank becomes evident.  The note is indeed a liability of the Fed, but the Bernank can honor that liability by printing more liabilities.  There is nothing  backing the under-lying liability owed by the Fed.  All of the QEs only perpetuate the myth.

Thu, 03/17/2011 - 18:13 | 1068584 mynhair
mynhair's picture

Just put a wooden stake into the TBTF already!  This is getting tiresome.

Big whoop if Soros winds up eating mud pies.

Thu, 03/17/2011 - 18:12 | 1068593 spinone
spinone's picture

Lets stick with the concept of the currency being debt saturated for a minute.

When a debt based fiat currency is debt saturated, game over. 

We do not have the capacity at this time to grow the economy and pay off the debts.

Either the debts are defaulted, or the currency remains broken.

The debts wont be defaulted because they debts are the TBTF assets, and they get mark to market.  The system that keeps the US middle class in debt slavery, and the currency broken, is supported by the system because it is TBTF. 

How long can this go on?  Until a crisis puts it over the edge.  Keep your eyes on Japan ripple effects for the next month.

Thu, 03/17/2011 - 18:35 | 1068706 Meme Iamfurst
Meme Iamfurst's picture

THAT  (Japan) is just the tip of the ice berg.  There will be no place untouched by world events unfolding, Japan is just the headline.

The Forth Turning, five planets in Aries, with Uranus sitting there until 2019...the collective world has no idea what is going to happen, but the status quo is ended.


Thu, 03/17/2011 - 19:00 | 1068859 Creed
Creed's picture

if ASSTROLOGY makes you so omniscient...

why don't you use it to trade the stock market, get uber rich, then come back here and tell us how it's done?


then I'll give you props

Thu, 03/17/2011 - 20:07 | 1069173 LibertyIn2010
LibertyIn2010's picture

"But, I see the tip of the iceberg and I worry about you."

RUSH - Distant Early Warning

If ZH had a theme song...this is it.


Thu, 03/17/2011 - 18:13 | 1068597 chump666
chump666's picture

On wires now!

*Japan radiation from plant could exceed Chernobyl

*Forum companies evacuating staff

*Tokyo airport gridlocked

Thu, 03/17/2011 - 18:15 | 1068610 mynhair
mynhair's picture

Wires.  Let me guess:  AP?

Thu, 03/17/2011 - 18:21 | 1068639 TruthInSunshine
TruthInSunshine's picture

Well, like I've been saying, there will be a series of crises between now and 8:45 tomorrow morning, and all hope will be restored just in time for market open.

Glow in the dark airline passengers from Japan notwithstanding.

Thu, 03/17/2011 - 18:16 | 1068605 Meme Iamfurst
Meme Iamfurst's picture

can't you just smell the rubber hitting the road?

Murphy's law, it ain't just for you anymore.

Thu, 03/17/2011 - 18:16 | 1068606 decklap
decklap's picture

Is the sky ever *not* falling on this blog?  Seems like you guys can't look out the window without getting the shit smaked out of you with a chunk of wild blue yonder

Thu, 03/17/2011 - 18:19 | 1068622 mynhair
mynhair's picture

My 'wild blue yonder'  is populated by Algore's aged (for Libs:  pronounced age-ed)  G-II.

Thu, 03/17/2011 - 18:28 | 1068669 anony
anony's picture

"A Zebra can't change its spots".   (an original Al-Gore-Rhythm)

Thu, 03/17/2011 - 18:19 | 1068630 TruthInSunshine
TruthInSunshine's picture

Take the blue pill.

Or are you prepared to make a case for 'green shoots?'

Thu, 03/17/2011 - 18:27 | 1068658 Jendrzejczyk
Jendrzejczyk's picture

Unvarnished reality takes a bit of getting used to.

Thu, 03/17/2011 - 18:51 | 1068795 RockyRacoon
RockyRacoon's picture

Truth.  Yep, it's a bitch.

Thu, 03/17/2011 - 19:08 | 1068901 Cynthia
Cynthia's picture

But unvarnished reality is too painful to handle without being Comfortably Numb:

Thu, 03/17/2011 - 21:28 | 1069495 StychoKiller
StychoKiller's picture

The snow has finally started melting -- enough for us to get most of the XMas decorations taken down.  Soon, the frogs will be peeping in the lake behind our property -- the World WILL continue to spin on its axis, whether Humans still exist to perceive it, or not.

Thu, 03/17/2011 - 21:44 | 1069580 TruthInSunshine
TruthInSunshine's picture

If The Bernank prints FRN and no one is around to receive it, does it make a POMO?

Thu, 03/17/2011 - 18:18 | 1068623 Bansters-in-my-...
Bansters-in-my- feces's picture

Is that chart "Happy to see Bernake" or is there a bannana
in it'pants.

Thu, 03/17/2011 - 18:37 | 1068660 anony
anony's picture

Not to be a critic, but while y'all have been weeping, gnoshing, and otherwise engaged in agonizing over a 100% predictable event, i.e. an earthquake and tsunami taking down a nukular reactor, you have been derelict in your responsibilities to keep us apprised of the goings on in the Insider Trading scandals.

F'r instance, What have you done to analyze the Call and Put action in the three previous months of LUBRIZOL???

You used to be right first in calling out these trades within seconds of their announcements and here we are a week later and nuthin'.

C'mon, man, get off the Japan train, and board the bus for Omaha. Who knew what when?


And what about Lord Blankfein thinking of stepping up from his post at Goddamn Sucks, after ripping us for a half trillion FRNs?   He goes on to greater glory with some other private capital company and works in deep cover for the rest of his days figgering who to put in charge of the next admenstruation.

Thu, 03/17/2011 - 18:51 | 1068785 mynhair
mynhair's picture

I admit, I was totally ignorant LUBRIZOL made Vaseline.  My mistake.


Thu, 03/17/2011 - 18:26 | 1068662 velobabe
velobabe's picture

Chart Art, courtesy of ZeroHedge†

Thu, 03/17/2011 - 18:30 | 1068682 jmc8888
jmc8888's picture

Fascist Schumpeter's Creative Destruction is happening, because the fascists WANT it to.  It's money making idea (to the squid) to destroy something, and then swoop in with fiat loans to 'build' it back up.

We have a resource crunch why? Because we haven't done what's necessary to procure increase supply.

In a universe full of 'supply', it's idiotic for us NOT to grab it.  A smaller scale example of this are nations that are next to oceans, who lack drinking water.  Why? Because they're idiots controlled by the banksters who won't let them build desalinization plants.

Well there is a universe full of 'supplies'.

Not to mention, there will be this invention, called a fusion arc, (after fusion is achieved obviously) that will produce elements 1-92.

No it won't be a star trek replicator, but it will ease many supply crunches. Enough to survive, until we better understand and invent better alternatives.

These are long term projects, worthy of generations of people actually doing something.  The benefit? Survival.

The most important thing to realize is that we have it in our human ability to increase the supply.  (oh yeah, and we've only gone through ~5 percent [depth wise] of the crust for materials, (and obviously not everywhere 5 percent) that we could reach, IF, we had the energy for it.

So the key to supply, is energy.

We may go through a 'manufactured' supply crunch, because for decades we decided we didn't need to study fusion on a large scale, scuttled improvement in space programs, and decided that printing money = solving problems.

But this isn't the way it SHOULD BE, nor is it the way it HAD TO BE, it'll possibly be this way, because we made the wrong decisions.

We still have time to avert most of the 'crunch', but literally no margin for error.

We need the following programs now.

NAWAPA = energy and water (and changing the environment...1st step of terraforming)

MAGLEV = better efficiency, and less gas hogs on the road (i.e. less energy for transportation)

Space Program = science driver..solve big, hard problems...through science...better materials...stronger, more heat resistance, superconductors, etc.  Even TANG.  (all of which spurs private industry given better materials and options to service the needs of the people)

Fusion program = the energy we need to go through the crust for the supply until we can create it ourselves, or find other places in the solar system.

Don't listen to the know nothing backwoods nay sayers.  We must have these, or we're fucked.  Deal with it. (no not through fiat, or depopulation, but using the human mind to overcome, these obviously overcomable obstacles)


Thu, 03/17/2011 - 18:35 | 1068699 spinone
spinone's picture

What we need is a program to repair the infrastructure we already have, to repair basic sanitation and transportation before it completely degrades over the next 40 years.  Not some pie in the sky technological fix.

Thu, 03/17/2011 - 18:40 | 1068739 jmc8888
jmc8888's picture

Pie in the sky? No it isn't. 

Were airplanes pie in the sky?



Someday what I laid out above will mean exactly to your thesis as the above do.

It ain't pie in the sky at all, only to people with no real vision.

What I describe ARE solutions to some very macro problems.


Mag lev is transportation.  Sanitation is of course involved, but can ONLY be achieved when everything else is flowing.  No toilet paper, no flowing water, etc, no sanitation.  You can't have sanitation, unless the macro problems are solved.

So solve them.  It isn't pie in sky, you've just been inundated with bullshit for far too long.  It's ok though.  We can all grow out of it.

Thu, 03/17/2011 - 18:49 | 1068771 RockyRacoon
RockyRacoon's picture

We need a simple toilet that will actually flush a turd on command.

(With deference to Mr. Ferguson.)

Thu, 03/17/2011 - 18:54 | 1068806 mynhair
mynhair's picture

(Clap) (Clap)   the Thomas Crapper.....

Thu, 03/17/2011 - 20:32 | 1069280 StarvingLion
StarvingLion's picture

Yeah but can you really run via 600.00 yearly subscriptions on a platform of basic infrastructure.  Hell, no,  a good con needs plenty of suckers...have you watched too much Star Trek and worked through too few physics texts?  If yes, then Lyndon is your man.

Thu, 03/17/2011 - 19:30 | 1069008 eddiebe
eddiebe's picture

Hey 8888 you have some good ideas, a lot of us do, there is a plethora of them floating around. That is not the problem. The problem is breaking the status quo and getting the people in power to get behind those ideas to make them reality. That is the real problem.

Thu, 03/17/2011 - 20:28 | 1069263 StarvingLion
StarvingLion's picture

What happened to your 10,000 fission reactor programme? 

Thanks for that, a paid nonsensical ad from Lyndon "We are an international organziation" Larouche.  Please send in your 600.00 yearly subscription so crackpot Lyndon can fill your peabrain with technodreams.

Now i'm gonna run around the block screaming "Fusion ,fusion, ...we can go to the I can't pass a high school physics exam"

Thu, 03/17/2011 - 18:32 | 1068686 Rainman
Rainman's picture

This business in Japan could very well be the event that blows the whole shitpile of interst rate derivatives wide open. Continue believing nothing you hear and only half of what you see.

Fri, 03/18/2011 - 04:57 | 1070395 Escapeclaws
Escapeclaws's picture

Yeah, we keep hearing about those $800 trillion of derivatives that are sitting their like some 20 megaton bomb with a lit fuse. It is strange that this topic is not discussed more.

Thu, 03/17/2011 - 18:33 | 1068700 eureka
eureka's picture

Q for ZH: WHEN - will U.S. bank stocks crash?

Any & All analysis and insight appreciated!

Thu, 03/17/2011 - 18:39 | 1068724 Quinvarius
Quinvarius's picture

Never.  You should consider them part of the government that will always get funding needs met.

Thu, 03/17/2011 - 18:57 | 1068817 mynhair
mynhair's picture

Define crash.  All downturns are limited by obscure Market rules, ie., does GS object?

Thu, 03/17/2011 - 18:38 | 1068714 Quinvarius
Quinvarius's picture

You had me at "potent cocktail".

Thu, 03/17/2011 - 18:40 | 1068736 JR
JR's picture

The rising prices on the stock market are just like the rising prices of gasoline and food; they are dangers to the system. QE inflation and debt saturation are driving coffin nails into the economy. 

Thu, 03/17/2011 - 18:55 | 1068807 bbaez
bbaez's picture

So we need DEFLATION?

Thu, 03/17/2011 - 19:44 | 1069075 JR
JR's picture

"QE3 is playing with fire. Or with a third dose of meth. Or another bottle of Four Roses. Choose your metaphor. It is a bad and deeply dangerous policy, all built on the insane view that if you stimulate a zombie with enough fiat money, it will start to live and breathe on its own.

"Reducing this even more, consider: If you drink enough, does your body start to generate its own liquor? The Fed and the government have hooked the American economy on a wicked drug. Our job is to drive the dealers from their seats of power." Lew Rockwell 

Thu, 03/17/2011 - 21:47 | 1069597 TruthInSunshine
TruthInSunshine's picture

But QE operations, by most governments, are popping up like two-bit garage and basement meth operations, all over the globe.

Thu, 03/17/2011 - 22:30 | 1069749 JR
JR's picture

Right, just trying to keep up with Bernank.   And what is being “stimulated” on the home front:  stock prices, food prices, gas prices, indiscretionaries. And that's just the beginning.  Says Rockwell, “Food prices rose the most since November 1974. Prices of raw materials rose by 3.4% in February from the previous month. Intermediate prices climbed 2.0%, with diesel fuel up a monthly 12.6% in February.

"These huge increases were counterbalanced by falling prices in cars, trucks, warehousing, and other areas that are already showing signs of a post-boom slump." And, of course, falling equity and prices in housing.

In the meantime, an unprecedented number of the chronically unemployed has been created, as Henry Hazlitt using Great Depression figures proved would happen with Keynesian deficit spending and artificially low interest rates.

The ranks of those out of work 99 weeks or longer have swollen to nearly1.8 million from 935,000 a year ago and 271,000 in 2008, according to the BLS. As a portion of the total unemployed population, those unemployed 99 weeks or longer have grown from about 3 percent before the economic downturn to 12.2 percent during February.

And savers, who literally are being wiped out by inflation, don’t have the clout to stop the big banks from using free money out of Bernank’s atomated money machine.

As a result of all this printing, according to Nathan’s Economic Edge:, "even with trumped up numbers, the PPI is screaming hot at 1.6% just for the month of February – if you annualize that figure it equals 19.2% inflation!"

Fri, 03/18/2011 - 05:10 | 1070402 Escapeclaws
Escapeclaws's picture

It really is amazing that the world's fate is being decided by the ideas of a defunct economist from the 1930's. Like many others at Zerohedge, I come here hoping to gain insight since understanding the economy has always seemed impossibly difficult. So comes down to groping in the dark and trying to find an economist that seems to have the best approach or the greatest insight, without really being able to say why. My vote goes to Steve Keen. He's done a great job debunking neoclassical economics such as that practiced by Krugman.  At the same time he understands the dynamics of the economy and has been able to model that successfully. Incidently, he has a great paper at his Debtwatch website showing the shallowness and sheer idiocy of Bernake's economic analysis.

Obviously economics is a compromised profession rewarding only those economists who are apologists for kleptocracy. 90% obfuscation. Maybe that's why it is so hard to understand economics.

Thu, 03/17/2011 - 18:54 | 1068811 Bastiat
Bastiat's picture

Fallout from crisis in Japan has reached the U.S. auto industry, with General Motors Co. on Thursday becoming the first domestic auto maker to shut down a factory because of troubles there.

Next week, GM plans to shut down a Shreveport, La., plant where it builds small pickup trucks because of a parts shortage caused by last week's earthquake and ensuing tsunami, the company said.

Japan's auto makers, including Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co., already ...

Thu, 03/17/2011 - 18:58 | 1068831 Creed
Creed's picture

When Americans understand it is not their inalienable right to have gas at $3 per gallon while everyone else pays $9 they will quickly get the message.



They pay more because of higher gasoline TAXES. Not market fundamentals.

Obama & his minions want the same gasoline TAXES here.

For no reason other then GROWING GOVERNMENT POWER.


Thu, 03/17/2011 - 19:15 | 1068934 Debtless
Debtless's picture

S  U  B  S  I  T  I  E  S  .   .   .  ;<

Thu, 03/17/2011 - 21:31 | 1069521 JR
JR's picture


The tax on gasoline in California as of July 2009 is 64.5 cents per gallon (includes federal tax of 18.4 cents per gallon).

And yesterday, in my area of California, I paid $4.15 per gallon - $83.00 for 20 gallons of regular.

As for what’s causing oil prices to rise, Nouriel Roubini says: 

“Even before the recent Middle East political shocks, oil prices had risen above $80-$90 a barrel, an increase driven not only by energy-thirsty emerging-market economies, but also by non-fundamental factors: a wall of liquidity chasing assets and commodities in emerging markets, owing to near-zero interest rates and quantitative easing in advanced economies; momentum and herding behavior; and limited and inelastic oil supplies. If the threat of supply disruptions spreads beyond Libya, even the mere risk of lower output may sharply increase the ‘fear premium’ via precautionary stockpiling of oil by investors and final users.”

As for how oil speculators drive up oil prices, Hazel Henderson ( see HAZEL HENDERSON: DOING WELL AND DOING GOOD IN NEW ENERGY)  in an op-ed piece wrote in early June of 2008 (the NYMEX Crude Oil Futures Close was $140.21 on June 2, 2008) :

“These witnesses (at Congressional hearings) estimate that if the Commodities Future Trading Commission (CFTC) were to implement 50% margin requirements, full disclosure of hedge funds and the volume of 'paper barrels' versus real barrels of oil and the huge institutional investor positions in the oil and commodities futures markets and other recommendations, then the price of oil would drop to somewhere between $70-100 per barrel within 30 days. They expect that US gasoline prices would drop in a similar time period by roughly the same percentage. They agree that curbing speculation is urgent, whereas drilling in the US for more supply would produce a small fraction of the reduction that could be achieved by curbing speculation.”

And we get hosed.

So, to keep the oil game going, Roubini wants you and me taxed to help fund "a bold new assistance program…for the (oil-rich) region, modeled on the Marshall Plan in Western Europe after WWII… Financing should come from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, as well as from bilateral support provided by the US, the European Union, China, and the Gulf states. The goal should be to stabilize these countries’ economies as they undertake their delicate political transitions.”

There it is, straight from the bankers’ and speculators’ mouthpiece.

Thu, 03/17/2011 - 19:05 | 1068861 mynhair
mynhair's picture

Geez, can't wait for the analysis of how Fed BS is going to result in the biggest deflation ever experienced.  Who is spending?  Goobermint.  Where will they get the dinero?  Nowhere.  It's a total train wreck.  Why can't the Dips see it?

I must say the freshman class has a clue; it's the old timers that are clueless.

Vote out the long-term farts!  Either party.  There is still a little time to derail this crap.

Thu, 03/17/2011 - 19:07 | 1068892 mynhair
mynhair's picture

Would love the see posts from anyone on what Goobermint does well, and why.

Dickhead comments on doom, need not reply.

I say NASA from before.  It gave us hope.  Must be why it was canceled.

Thu, 03/17/2011 - 19:17 | 1068940 Debtless
Debtless's picture

We blow stuff up pretty good. 

Thu, 03/17/2011 - 19:11 | 1068917 mynhair
mynhair's picture

'Hope' was only a word in ODummer's campaign.

"Words, just words!"

Thu, 03/17/2011 - 19:19 | 1068948 apberusdisvet
apberusdisvet's picture

What the goobermint does well?


The redistribution of the fruits of honest labor into off shore bank accounts of the politically connected.

Thu, 03/17/2011 - 19:20 | 1068964 equity_momo
equity_momo's picture

This is a very good report. Succinct and accurate. Its nice to be back to some cold hard macro facts : as important as the Japanese scenario (and M.E) are , they are still sideshows and speedbumps to the inevitability of where the global economy is heading.

Thu, 03/17/2011 - 19:34 | 1069030 eureka
eureka's picture

@ Quinvarius - thanks, I see your point, banks are gevernment backed, however - and defining "crash" as 'like when S&P hit 666 2years ago" - WHEN will that happen - again - and what might trigger it this time...? Anyone?

Thu, 03/17/2011 - 19:39 | 1069049 Seasmoke
Seasmoke's picture

they must keep up the ponzi scam, as they cant have a collpase of property taxes or public pensions

Thu, 03/17/2011 - 20:15 | 1069192 blindman
blindman's picture

Keiser Report: Mad Mob vs Midwest Mubaraks March 17th, 2011

program includes a very fascinating discussion with

michael bentancourt concerning agnotologic capitalism

and virtual vs other than virtual economic considerations.

not to mention stealing in broad daylight and calling

it systemically important financialization.  ( my bad ).. apologies

where needed.  also mentioned is the never ending and apparently

irresistible american political shadow boxing that  always results

in further degradation of the american way of life and standard of

living / quality of life.

Thu, 03/17/2011 - 20:47 | 1069349 Bicycle Repairman
Bicycle Repairman's picture

"When Americans understand it is not their inalienable right to have gas at $3 per gallon while everyone else pays $9 they will quickly get the message. That day is fast approaching."

Everyone else pays more due to taxes. Period. 

In order to get the people to reduce their gasoline consumption the "leadership" of this country must allow alternative transportation to be developed.

Thu, 03/17/2011 - 21:22 | 1069471 monopoly
monopoly's picture

That was great. We are getting close now. Be prepared.

Thu, 03/17/2011 - 21:47 | 1069582 ThirdCoastSurfer
ThirdCoastSurfer's picture

And yet with this and everything else going on the dividends announcements will "leak" out tomorrow:


Now is not the time to be short the XLF! A rising tide lifts all bullshit. 

In June, when it turns out the economy is back in decline, QE3 becomes necessary, I hope gentle Ben puts a little aside to bail them out all over again and I hope Barney Frank begins to make advance reservations for a congressional hearing to examine how this was allowed to happen.   

Thu, 03/17/2011 - 22:37 | 1069778 TwoShortPlanks
TwoShortPlanks's picture

But what if China, Russia, or a group of countries force the US Fed (Via Gov) NOT to continue the QE Program...what then???

Everyone's been disucssing what the repurcussions will be with the assumption that QE will have to continue becuase of economic realities, but what about the possibility of a hidden threat...what if it does not continue for whatever reason, what then???

How long before the inevitable turmoil???

Fri, 03/18/2011 - 00:45 | 1070101 TruthInSunshine
TruthInSunshine's picture

I know very little, and realize how much less I know with each passing year.

But I am confident that many western nations have decided to put their citizens, used to cushy lives and high standards of living, into a slowly boiling pot of water, like lobsters or frogs.

This way, they can ratchet up the heat over time, and the drop in living standards isn't as likely to be so shocking, over a short period of time, that there's a statistically high possibility of all out revolt.

And this is consistent with that New World Order mantra, I do believe, as the elite have decided that there are too many "useless eaters" (except for their families, of course; just like Al Gore flying his jet everwhere, including places he could have taken mass transit to), that the discrepancy in living standards between the haves and have nots around the globe needs to be reduced (in a way where the middle class now will make less - not whereby the poor will make that much more; this is better for corporate profits), and that formerly independent and fiercly sovereign nations succumb to the NWO teat, as they see times get very rough, so they make a Faustian Pact in order to ensure their children have enough to eat and some medical care.

That's the blueprint, essentially. And it's working so far.

Fri, 03/18/2011 - 01:54 | 1070247 Slim
Slim's picture

While I certainly find some of the happenings a bit odd (I'm not entirely adverse to conpiracy theory), it should be pointed out that the 'elites' basically blew themselves to hell in this and took the world with them.  It's not like a few people deftly sidestepped while executing the "master plan".  They were just as dumb and leveraged as the sub-prime borrower making $45K a year signing on for a $500K house in CA.  Actually, they were "dumber" because they were educated with better skills, historical reference, and should have known better.  Plus, people impoverishing nations purposely tend to get themselves hung or ripped appart by crowds - that's not lost on most humans.


Honestly, all the elites blew the hell up including their educational institutions, governments, charities, banks, and personal portfolios (companies did okay as leverage blew up in the corp world a decade ago similar to many EM countries).  Basically everything they cared about and would protect.  They were even more scared than the average person because they had so much to lose and actually had visibility into what the hell was going on.


I think in some way its comforting to think that someone really knows what they are doing and has a master plan of some kind.  Maybe a non-benign God analogy but similar placement, above and untouchable.  I've never once seen any evidence of this no matter how smart or high up.  I've seen some interesting theories but it's similar to 'don't meet your hero, you'll be disappointed.' 

Fri, 03/18/2011 - 03:05 | 1070342 Garbage Can Ray
Garbage Can Ray's picture

This is my inaugural post on ZH. Long time reader. Apparently I have had an account for some time, but Tyler's crew never bothered to send me my log in info. Well, I am here now. Great site. Anyways, I figured that maybe I could translate some of this stuff into plain english, or semi-plain english. 

What has transpired as a result of the financial crisis is that an absurd amount of private liabilities have been transferred onto the public books. Primarily the Fed and the Treasury. Therefore, "the deflation" is like fucking kryptonite to the Fed, Treasury and the U.S. government. They are now in the situation that Citi, BofA, Goldman, Bear, Lehman, et al found themselves in circa 2008-2009. When you are highly leveraged and asset values begin to fall precipitously, you are done. 

In order to save the world during the financial crisis, the Fed and Treasury and the U.S. government absorbed many of these liabilities. The only way that they can circumvent the same fate that befell Bear and Lehman is to reflate the asset bubbles. They are caught in a vicious circle. The Fed, Treasury and government are now so leveraged, as a result of their assumption of privately held risk, that they NEED prices to rise and interest rates to remain incredibly low. 

Rising rates will cause the U.S. governments' Ponzi financing to collapse. Falling asset prices will cause a similar collapse to what we saw with the private banks during the financial crisis. The difference is, however, that the Fed can print money and thereby create price increases by way of inflation fears and liquidity ramps. That is what is going on. The problem is, how to get out of this. The Fed needs a very strong self-sustaining economy with a healthy rate of inflation. Unfortunately, the deflationary forces of de-leveraging and debt repatriation may be too much for the economy in the absence of quantitative easing. 

If the economy can not self-sustain at a very high growth rate, the Fed, Treasury, and the U.S. government are fucked. They will have to keep printing to stave off any kind of deflation, which will kill them as a result of falling asset prices, lower revenues (have you looked at state liabilities?) and potentially uncomfortably high funding costs if the Fed is not buying bonds and the economy is not growing at a sufficient rate. 

Fri, 03/18/2011 - 12:49 | 1071940 newbee
newbee's picture

Mr. Long, I've read and re-read your article multiple times while researching various components of your information within other info caches and google searches to bring my full comprehension up to speed.

I have to say your article has to be one of the finest I've read - concise, professional while using easily understood normal english even us mortals can understand and amazingly broad reaching in such a short length.  Well done, and thanks much, I look forward to more of your articles.

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