Guest Post: The Economic Death Spiral Has Been Triggered

Tyler Durden's picture

Submitted by Gordon T. Long

The Economic Death Spiral Has Been Triggered

For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended.  It is now in the process of reversing and becoming a vicious downward economic spiral.
One of the strategies is the Asian Mercantile Strategy.  The other is the US Dollar Reserve Currency Strategy.

These two strategies have worked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end.

One of the two global strategies enabled the Asian Tigers to emerge and grow to the extent that they are now the manufacturing and potentially future economic engine of the world.

The other allowed the US to live far beyond its means with massive fiscal deficits, chronic trade imbalances and more recently, current account imbalances. The US during this period has gone from being the richest country on the face of the globe to the biggest debtor nation in the world.

First we need to explore each strategy, how they worked symbiotically, what has changed and then why the virtuous cycle is now accelerating into a vicious downward spiral.


The Asian Mercantile Strategy started with the emergence of Japan in the early 1980s, expanded with the Asian Tigers in the 90s and then strategically dominated with China in the first decade of this century.

Initially, Japan's products were poor quality and limited to cheap consumer products. Japan as a nation had neither the raw materials, capital markets, nor domestic consumption market to compete with the giant size of the USA. 

To compensate for its disadvantages, Japan strategically targeted its manufacturing resources for the US market.  By doing this, the resource poor island nation took the first step in becoming an export economy - an economy centered on growth through exports versus an economy like the US, where an excessive 70% of GDP is dependent on domestic consumption.

The strategy began to work as Japan took full advantage of its labor differential that was critical in the low end consumer product segment, which it initially targeted. Gradually, as capital availability expanded, Japan broadened its manufacturing scope, moving into higher levels of consumption products requiring higher levels of quality and achieving brand recognition.

Success soon became a problem as the Yen began to strengthen. To combat this the Japanese implemented the second critical component of what became the Asian Mercantile Strategy template. It began to manipulate its currency by aggressively intervening in the forex market to keep the yen weak.

Further success forced Japan to move to a more aggressive forex strategy to maintain a currency advantage. It was strategically decided that Japan's large and growing foreign reserves were to be re-invested back into the US.  By buying US Agency and US Treasury debt instruments it kept the dollar strong relative to the Yen. The more successful Japan became, the more critical this strategy became.  In the 80s Japan dominated global expansion as it brought US automotive and consumer electronics' manufacturing to its knees.

By the early 90s the Japanese labor advantage was quickly being lost to the Asian Tigers because the Yen versus the Asian Tiger currencies was too strong.  The Asian Tigers were following the Japanese model. The Asian Crisis in 1997 re-enforced to all Asian players the importance of holding large US dollar denominated reserves. This further accelerated and reinforced the strategy of purchasing US Treasury and Agency debt.

With China's acceptance into the World Trade Organization (WTO),  China emerged on the scene in full force. Armed with the lessons of the last twenty years, China took the Asian Mercantile Strategy to another level in its ongoing evolution.

The results were one of the largest and fastest transfers of industrial power ever to occur in history.  In ten years, China assumed the role of the world's undisputed industrial powerhouse in the world.

The virtuous cycle further accelerated as Asia became more dominant because its reserves, reinvested back in the US, began to have a larger and larger impact. The more Asia bought US Treasury and Agency debt, the lower US interest rates were forced, allowing Americans to finance more and more consumption. The more Asia bought US securities, the stronger the US dollar was against Asian currencies, and therefore the cheaper Asian products were relative to US manufactured products. It was a self reinforcing Virtuous Cycle.

The result was  a staggering 46,000 factories transferred from the US to Asia over the same 10 year period.  The transfer  set the stage for chronic unemployment and public funding problems,  but it was temporarily hidden by equally massive increases in debt spending.

The low interest rate driven housing bubble, being of historic proportions, made Americans feel richer than they were. They took on excess debt in various forms such as Home Equity Loans (HELOCs) at unprecedented levels. The acceleration of debt  materially impacted both the GDP and employment  of the nation through Real Estate, Construction and Mortgage Finance job growth further hiding underlying problems.


Since President Richard Nixon took the US off the Gold Standard in 1971, the US has adopted what I refer to as the US Dollar Reserve Strategy.  After the Second World War, at the Bretton Woods Conference, the US dollar was accepted as the world's reserve currency and as such was pegged to Gold at a fixed rate of $35/oz. due to massive Vietnam  war costs and President Johnson  Great Society, the US could no longer honor its agreement.  In 1971, when France demanded conversion payment in Gold, the US refused. At this point the US become a fiat currency,  not backed by anything other than the full  faith and credit of Washington politicos. 

What were other countries to do in retaliation? What quickly became evident was there was little they could do. The fact was that international trade was conducted in US dollars as a matter of necessity due to the dominance of US export trade;  and as such, nations were forced to have US dollars to transact international trade.

Additionally, the US established agreements with oil producing Middle East countries that oil could only be sold in US dollars. Since energy is a dominant import cost for most nations, this secured the strategic position and requirement that the US dollar would be maintained as the preeminent reserve currency by trading nations.

What this strategy meant to the US was that it could now print money, and effectively export the potential inflationary consequences of its actions. The 1970s were initially marked by dramatic increases in US inflation as the strategy took hold and was implemented. By the time of President Reagan's presidency, the strategy was working thanks to some herculean efforts by Chairman Volker at the Federal Reserve. This well executed strategy is what I refer to as the US Reserve Currency Strategy.

The strategy allowed Regan to implement 'Reaganomics' and his new Supply Side economic policies which launched the longest bull market in US history.  Further enhanced by an extremely loose monetary policy under Greenspan, relaxed reserve requirements under Clinton, and tax cuts under George Bush II, the US moved quickly from being the world's richest country to being the world's largest debtor. 

Historic debt growth was built up without the disease of inflation infecting the US economy. This is explained by inflation that was effectively exported whenever increasing levels of US dollars were printed by the US Treasury.

Any threat to this strategy was rapidly challenged by US military power. As an example, when Saddam Hussein, President of Iraq, decided to sell Iraq oil denominated in Euros, he was invaded by US forces three months later and removed from power. When Libyan leader Muammar Gaddafi wanted gold in exchange for Libyan oil, he almost immediately found himself the target of US planned military intervention.

Presently, oil is still sold only in US dollars, but more and more trade deals are being negotiated between China and its trading partners. This is a serious threat to the US and the US Dollar Reserve Strategy.


One of the reasons the US Reserve Strategy has worked for as long as it has, is because there was an incentive by other countries to sterilize the US dollars they received.  This, in the case of Asia, was because of the Asian Mercantile Strategy they were executing. By sterilizing US dollars, they held down their currency's exchange rate, which helped their exports though creating potential domestic inflation. Until recently, these inflation pressures have been manageable.

In the case of Europe, the Euro was only coming into existence in the late 90s, but then quickly moved from well below par to nearly 1.50 to the US dollar, causing competitive problems for European export trade for many peripheral countries (PIIGS).

The Asian Export Strategy and the US Reserve Dollar Strategy were symbiotic for a number of reasons:

1.    Though the Asian Export Strategy was an Export Trade Imbalance game and  the US Dollar Reserve Strategy a Volume Trade game,  both were centered on global trade. The US won by increased global trading and the growing requirement for the US dollars it required - dollars that could be increased to pay for the military industrial complex without increasing taxation and used as reserves for global banking growth. Asia won by getting an ever increasing share of a growing volume of trade.

2.    The US as a 70% consumption economy needed cheap financing to sustain its insatiable consumption. Asia needed consumption to absorb its growing exports.

3.    The US needed a strong dollar to attract financing for its debt. Asia saw US debt as a store for its growing reserves that additionally reduced financing costs for its export products. In a way Asia was offering a form of vendor financing or 'lay away' financing.

4.    US corporations saw 'off-shoring', 'outsourcing' and 'rightsizing' as major productivity improvements. The Asian Mercantile Strategy offered American corporations an opportunity to significantly increase profitability while Asia needed every increasing and larger market segments to penetrate. US corporations brought know-how, branding and capital to the Asian economies who desperately needed these strengths to employ unskilled populations, increase standards of living and reduce the always present and potential social unrest. 

5.    The US economy which had shifted from an industrial economy to a services economy was quickly becoming a financial economy with 44% of the stock market being financials. The financial economy needed increasing capital inflows to sustain itself.



So what could possible stop this ideal symbiotic relationship from continuing to feed on itself?

A number of factors, all of which are now coming together to end this Virtuous Cycle.


I recently authored a paper entitled  Debt Saturation & Money Illusion , that if you have not read, I encourage you to read since it would take up too much space here.  It makes the case that the global economy has reached the point where annual debt costs are now outstripping the global economy's ability to support the exponentially increasing burden.

Additionally, stimulus spending by governments has now reached the point where it is actually counterproductive.

The above chart shows that even using government numbers for inflation (which are disgracefully inadequate and understated) the real rates in the old industrialized economies are negative. By contrast, rates in emerging economies are positive.

This means central banks are effectively paying banks to take money, yet commercial banks cannot find sufficient investments to actually absorb the money.  Like pushing on a string, the global economy simply cannot absorb debt at the levels required to sustain required growth rates which must exceed inflation rates.

The level of nonperforming bank assets is growing at such a rate that global banks have serious concerns with their existing loans and potentially their own solvency.

Growth in Non Performing Bank Loan Levels is shown below.


I found a recent article entitled: Technology firms struggle to cover interest payments in the Korean Times to be very instructive. Despite Asian economies growing rapidly and now dominating the global electronics industry, the study by the Korean Times found alarmingly that:

a.    One in three firms traded on the Kosdaq stock exchange failed to earn sufficient money to cover their interest payments in 2010.

b.    280 out of 876 Kosdaq-listed corporations, or 32 percent, could not reach the benchmark reading of one in the interest coverage ratio. The interest coverage ratio, otherwise dubbed times interest earned (TIE), refers to the measure of a firm’s ability to honor its debt payments.

This is classic mal-investment in the truest sense of the Austrian School of Economcis.

Corporations now have balance sheets so leveraged with debt that their business models are barely able to cover debt payments even when interest rates are at historic lows. What does this suggest for possible debt default and forced unwinding going forward?

Private Equity corporations with leveraged takeovers and buyouts dominated the US financial landscape for years. These takeovers left corporate balance sheets severely damaged and barely able to pay the debt burdens they were forced to assume.

Additionally, we have learned since the days of Enron, there are significant amounts of debt held off balance sheets today in Special Purpose Entities (SPEs). There is no investor transparency to these obligations. This debt and other forms of 'contingent liability' reporting presently allow corporations to assume ever larger amounts of debt without impacting their corporate credit ratings. Everything works fine until growth slows.

Corporations over the last decade are acting more as highly leveraged hedge funds with the consequential exposure of margin or collateral calls. This is a highly risky and unstable situation in the longer term.


Another factor causing the unwind is a tapped out US consumer.  This has been forecast for over a decade as an eventuality, but the US consumer continued to surprise everyone with their willingness to consume and take on debt.  However, since the 2008 financial crisis things have changed. The US real disposable income has fallen and US consumer debt loads are now impacting their ability to consume.

Consumption growth rates in the US have slowed.  The Asian economies have consumption rates below forty percent. The consumption growth rates of these Asian economies, though growing,  are increasing from a much smaller absolute size. This imbalance is placing further pressures on the symbiotic relationship.


Slowly, the cycle is reversing. What was once a virtuous cycle is now a potentially vicious downward spiral.

The death knell for the cycle will be:

1.    A deteriorating  US dollar,

2.    Rising US interest rates,

3.    Sustained and chronic US unemployment,

4.    Asian inflation, especially in food where 60% of Asian disposable income is spent.

5.    Pressures on Asian currency pegs

6.    Collapsing values of US Reserve holdings.


I recently published another paper entitled BERNANKE'S QEx BOX! where I argued what Chairman Ben Bernanke was likely to do at his critical April 27th FOMC 'Signal' meeting.  I was proven right as he delivered precisely on cue. It was not a difficult call.

The reason I was so sure is because the real problem was clear. It is about what the Basel BIS (Bank of International Settlements) Bankers are more than aware of.

As I point out in Debt Saturation & Money Illusion, the Shadow Banking liabilities have fallen by $5 Trillion since the financial crisis, which is a crushing blow to global liquidity and in fact global financial banking solvency.

An analysis of data by Fathom Consulting for the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, showed their assets swelled from around $4 trillion at the start of 2006 to just short of $9 trillion by the end of February this year.  The increase in the size of G4 central bank balance sheets since mid-07 has ALSO been around $5 trillion to end February 2011, or 8 percent of global GDP.

It is my view that the Basel BIS Bankers have orchestrated their balance sheet growth to offset the contracting Shadow Banking System liabilities. For those that are not aware, Federal Reserve Chairman Ben Bernanke, Bank of England Governor Mervyn King,  ECB President Jean-Claude Trichet and Bank of Japan Governor Masaaki Shirakawa all sit as Board Members and meet regularly.


To do this the central bankers have increased their balance sheets to their political limits which can be seen in the following Federal Reserve chart from Zeal.

In the case of the US Federal Reserve, this has meant such significant changes that effectively the Fed's dual mandate has now expanded to three.  Besides the official  mandates of Full Employment and Price Stability, a third has been added: Asset Appreciation.
This is clearly evident when we overlay the above balance sheet growth with US equity market appreciation, as represented by the S&P 500 in the chart below.

The top of the red Treasury series (chart above) represents the total Treasuries, MBSs, and agencies the Fed purchased in its quantitative-easing campaigns.  That red line above is then transferred to the second chart below as total QE.  Superimposed on top of it is the US stock markets as represented by the SPX (blue).  The strong correlation between the Fed’s monetization and the post-panic stock-market recovery is remarkable, perhaps even scary.


The Federal Reserve is no longer the "Lender of Last Resort"

The Federal Reserve is now the "Buyer of First Resort"



There can be little doubt, despite Federal Reserve rhetoric, that Quantitative Easing , ZIRP (Zero Interest Rate Policy) and negative real interest rates have caused  a surge in global inflation rates.

Recently Oil was at a 31 Month high and up 22 percent Year-on-Year. Corn was up 90 percent,  Wheat and  Soybeans up 45 percent and Rice at yet another high.

This inflation has been acutely felt throughout Asia which has to combat this in parallel with trying to keep their currencies competitive as part of their Asian Mercantile strategy.

Across Asia, interest rates and bank reserve requirements have been increased, and in some instance capital control restrictions implemented.  Pressures are such that many, including China, are now at the point of surrendering sacrosanct currency appreciation.

The problem is food inflation. Food must be imported and a stronger currency would help avoid consumer sensitive food inflation, at the expense of assisting with its own export strategy.

Sixty percent of disposable income in Asia, according to the Asian Development Bank (ADB) in a major report entitled: Global Food & Price Inflation & Developing Asia, is spent on food.  Food is presently expected to average 10 percent inflation in 2011. This has created tremendous pressures on the population and potential social unrest for Asian governments.

64 Million people have already been moved into the category of poverty, which the ADB classifies as  below $1.25/day. With 3.5 Billion consumers, it is expected that 190 Million will be pushed into poverty if food inflation continues. Food prices were up 30% in February's report, so the 10 percent Asian food inflation is no doubt seriously too low.


The efforts to fight inflation are now impacting the 7.8% Asian growth rate, which is now demonstrating the expected signs of slowing.

US Gross domestic product was recently reported as rising only 1.8 percent from January through March, after a 3.1 percent pace in the last three months of 2010. Taking out inventory builds this number as only 0.8 percent.

Britain reported 0.5 percent growth and is now on the edge of a double dip.
The Federal Reserve and most economists are all revising 2011 GDP growth lower, as a steady stream of negative news hits the markets.

If GDP numbers were adjusted for true inflation, rather than the suspect government CPI distortions, real GDP would be negative. Considering government deficit spending is now 20-25 percent of the US economy, can there be any question that we have effectively very negative economic growth?

The Basel BIS Bankers are acutely aware of this. 

QEX WILL HAPPEN - 'The Risk-Off that Refreshes'

So what is to be done?

I believe a decision has been taken to temporarily remove some of the pressures off increasing money supply before resuming expansion of money and credit later in Q3 or Q4. There is little choice.

Make no mistake about it however, central bank money printing must continue and at an accelerated rate.  I suspect it will emerge not as QE III, but in another form to address the massive and growing problems with non-performing assets, foreclosures and REOs occurring at Fannie, Freddie and the FHA.

Don't get fooled. Watch the balance sheets of the central banks. They will by necessity continue to grow to stop the vicious spiral from accelerating.


The Basel BIS Bankers fully understand the underpinnings of the shift from a Virtuous Cycle to a Vicious Spiral presently underway.

They are doing everything within their power to offset it. Policies of "extend and pretend" and "kick the can down the road" are all just attempts at buying time.

Unfortunately time is working against them, as existing debt only increases as interest owed is relentlessly and cumulatively added.

The Basel BIS Bankers have no real answers. The eventuality of a fiat currency crisis is ordained and has been since the early warnings in 2007 of the Financial Crisis. The roadmap has been clear to all that actually wanted to look.

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FunkyMonkeyBoy's picture

To cut a long story short... it was the FED that did it.

akak's picture

Dr. Bernanke in the drawing room with a printing press.

GetZeeGold's picture


So basically it's just the worse possible scenario imaginable....that's all you had to say.



tekhneek's picture

QE3 then, it won't matter. I can already see how this pans out for the most part. At this point it would be  incredible if they actually reversed the fiscal deterioration to a manageable level and actually got stuff on track.

LOL I kid, I kid.

I see QEn like most people here until the dollar and every last fraction of a cent is inflated into the pockets it was intended to go to in the first place.

Everything else at this point in time is just kind of silly.

John Williams said he sees hyperinflation hitting the US before 2014.

When asked about the timing of hyperinflation in the United States Williams stated, “That’s the type of thing that could happen at any time, all of the fundamentals are in place.  I do think we’re going to have a dollar crisis.  I can’t give you the precise timing on it, but circumstances are negative for the dollar in terms of relative political stability.  When you look at our government here we can’t control the fiscal conditions.  Our trade deficit is continuing to deteriorate, that’s a negative for the dollar, inflation is rising on a relative basis, that’s a negative for the dollar.”

The Fed although it is officially ending QE2, most likely is going to come back with a QE3 and that will debase the dollar and if we are going to debase the dollar the rest of the world generally is not going to want to hold it.”

When asked how quickly could we see a dollar collapse Williams responded, “It could happen very quickly, but they (the Fed) will try to forestall it as much as they can.  When you do get a real panic it may not be containable.  In terms of the hyperinflation I don’t think it will be held off beyond 2014.  What we’re now seeing in the pickup in inflation here eventually will be seen as the beginnings of it.”

I hear other people saying deflationary hyperinflationary collapse and all this stuff. I'm not even sure which side I can agree with/disagree with. I just know shit's fucked and fiat money isn't where you should preserve your wealth right about now.

Shocker's picture

I can't agree more. Look at all the charts above, reading ZH daily you can see pretty clear this country is headed in the wrong direction.

We can no longer just say change or recovery without any real numbers to back it.

FEDbuster's picture

Great article, cliff notes version "we're fucked".  Just wondering how long a US dollar backed by the US military will hold up as reserve currency?  When the world cuts up our credit card, it will be time to get out of Dodge.

grekko's picture

"get out of Dodge"...Right, but go where?  Another planet?

i-dog's picture

You appear to be ignoring the advice that everyone here was giving the poor old Japanese lady in Fukushima in another thread just yesterday ... to just GTFOOD! ... to anywhere you will be safer!

Canada, Central America, Caribbean, South America, Oceania, Asia, Eastern Europe.... It doesn't matter where ... just GTFO before they slam the farm gate shut and you are unable to either get out or get anything of value out (past the x-raying body scanners and perverted gropers at every airport and border crossing ... just looking for gold, diamonds, fiats, jewellery or anything else of value that 'terrorists' typically hide on their person or in their vehicle when they try to leave 'the home of the free').

Anyone who hasn't moved their wealth out while it is still possible over the next [very] few months will only have themselves to blame -- when all they can take to the FEMA camp is their embedded electronic identity tag!

PY-129-20's picture

So, your advice is to give up your country and to run away? The places you named - why will they be in a better position?

No, no. I think this will be a global depression - and yes, some will go out of this crisis in a better position. But I think there is also the possibility of war.

One question: Will you serve the Persian Emperor?

Just sad what has happened to the American citizen. You certainly do not deserve to live in the country that people like General Washington built up - they fought the most powerful army in the world, they had dozens of desperate moments where the war could have ended in a different way...

The system will fail and you should prepare, yes. But your nation will be in need of good people after that. I just hope that the American citizens will take back their nation that was stolen by kleptocrats. I am not even an American. And yes, I am aware that there are many things to hate about the current America, but there is also much to admire and to keep in mind. I don't like your government, as well as I don't like our government. Many so-called world leaders are just a f... joke.

It will be a difficult and tough time. But it also will be a time to reflect things, it will provide us with an opportunity. An opportunity we missed in '08-'09. Your president cannot change your country. This will be a quest for the American citizen.

boiltherich's picture

General Washington did not have to fight against a multi trillion dollar organization that has super computers at their beck and call that have every data bit ever produced on you, the British could not then shut down your visa and mastercards, the Brits could not track you by your cars' computer or your cell phone GPS, and they did not have you by your SSN tattooed balls.  If/when TSHTF our government will not be a foreign power of about one hundred thousand musket bearing conscripts, it will be a two million person military plus the NSA, CIA, TSA, Homeland Security, and every deputy and policeman in the USA.  Each with access to all the tools of modern technology some of which is so advanced you are not allowed to know of it's scope or capability.  This is not the rural agrarian paradise the founders established a couple hundred years ago and we are not simple yeoman farmers tending the earth.  To make such comparisons might well be fatally foolish, there is wisdom in admitting that sometimes you have to run away to fight another day. 

OldTrooper's picture

You certainly do not deserve to live in the country that people like General Washington built up

That country hasn't existed for at least 90 years - maybe for 150 years (more or less).

Regardless, it's not unpatriotic to safeguard your family and property even if that means leaving the US.  Anyone that can make arrangements to get to a safe haven would, in my opinion, be remiss not to do so.

Chuck Walla's picture

Please don't forget that we, the people, let the kleptocrats have it in the first place. And when self-serving, egotistic liars, once again start offering to buy votes, things will be like it never happened.  Just a few dollars more...

Hugh G Rection's picture

1) All the global banks were up to their eye-balls in toxic assets. All the AAA mortgage-backed securities etc. were in fact JUNK. But in the balance sheets of the banks and their special purpose vehicles (SPVs), they were stated to be worth US$ TRILLIONS.

2) The collapse of Lehman Bros and AIG exposed this ugly truth. All the global banks had liabilities in the US$ Trillions. They were all INSOLVENT. The central banks the world over conspired and agreed not to reveal the total liabilities of the global banks as that would cause a run on these banks, as happened in the case of Northern Rock in the U.K.

3) A devious scheme was devised by the FED, led by Bernanke to assist the global banks to unload systematically and in tranches the toxic assets so as to allow the banks to comply with RESERVE REQUIREMENTS under the fractional reserve banking system, and to continue their banking business. This is the essence of the bailout of the global banks by central bankers.

4) This devious scheme was effected by the FED’s quantitative easing (QE) – the purchase of toxic assets from the banks. The FED created “money out of thin air” and used that “money” to buy the toxic assets at face or book value from the banks, notwithstanding they were all junks and at the most, worth maybe ten cents to the dollar. Now, the FED is “loaded” with toxic assets once owned by the global banks. But these banks cannot declare and or admit to this state of affairs. Hence, this financial charade.

5) If we are to follow simple logic, the exercise would result in the global banks flushed with cash to enable them to lend to desperate consumers and cash-starved businesses. But the money did not go out as loans. Where did the money go?

6) It went back to the FED as reserves, and since the FED bought US$ trillions worth of toxic wastes, the “money” (it was merely book entries in the Fed’s books) that these global banks had were treated as “Excess Reserves”. This is a misnomer because it gave the ILLUSION that the banks are cash-rich and under the fractional reserve system would be able to lend out trillions worth of loans. But they did not. Why?

7) Because the global banks still have US$ trillions worth of toxic wastes in their balance sheets. They are still insolvent under the fractional reserve banking laws. The public must not be aware of this as otherwise, it would trigger a massive run on all the global banks!

8) Bernanke, the US Treasury and the global central bankers were all praying and hoping that given time (their estimation was 12 to 18 months) the housing market would recover and asset prices would resume to the levels before the crisis. .

Let me explain: A House was sold for say US$500,000. Borrower has a mortgage of US$450,000 or more. The house is now worth US$200,000 or less. Multiply this by the millions of houses sold between 2000 and 2008 and you will appreciate the extent of the financial black-hole. There is no way that any of the global banks can get out of this gigantic mess. And there is also no way that the FED and the global central bankers through QE can continue to buy such toxic wastes without showing their hands and exposing the lie that these banks are solvent.

It is my estimation that they have to QE up to US$20 trillion at the minimum. The FED and no central banker would dare “create such an amount of money out of thin air” without arousing the suspicions and or panic of sovereign creditors, investors and depositors. It is as good as declaring officially that all the banks are BANKRUPT.

9) But there is no other solution in the short and middle term except another bout of quantitative easing, QE II. Given the above caveat, QE II cannot exceed the amount of the previous QE without opening the proverbial Pandora Box.

10) But it is also a given that the FED will embark on QE II, as under the fractional reserve banking system, if the FED does not purchase additional toxic wastes, the global banks (faced with mounting foreclosures, etc.) will fall short of their reserve requirements.

11) You will also recall that the FED at the height of the crisis announced that interest will be paid on the so-called “excess reserves” of the global banks, thus enabling these banks to “earn” interest. So what we have is a merry-go-round of monies moving from the right pocket to the left pocket at the click of the computer mouse. The FED creates money, uses it to buy toxic assets, and the same money is then returned to the FED by the global banks to earn interest. By this fiction of QE, banks are flushed with cash which enable them to earn interest. Is it any wonder that these banks have declared record profits?

12) The global banks get rid of some of their toxic wastes at full value and at no costs, and get paid for unloading the toxic wastes via interest payments. Additionally, some of the “monies” are used by these banks to purchase US Treasuries (which also pay interests) which in turn allows the US Treasury to continue its deficit spending. THIS IS THE BAILOUT RIP OFF of the century.

Now that you fully understand this SCAM, it is left to be seen how the FED will get away with the next round of quantitative easing – QE II.

Obviously, the FED and the other central banks are hoping that in time, asset prices will recover and resume their previous values before the crisis. This is a fantasy. QE II will fail just as QE I failed to save the banks.

The patient is in intensive care and is for all intent and purposes brain dead, although the heart is still pumping albeit faintly. The Too Big To Fail Banks cannot be rescued and must be allowed to be liquidated. It will be painful, but it is necessary before there is recovery. This is a given.


When the ball hits the ceiling fan, sometime early 2011 at the earliest, there will be massive bank runs.

I expect that the FED and other central banks will pre-empt such a run and will do the following:

1) Disallow cash withdrawals from banks beyond a certain amount, say US$1,000 per day; 2) Disallow cash transactions up to a certain amount, say US$10,000 for certain transactions; 3) Transactions (investments) for metals (gold and silver) will be restricted; 4) Worst-case scenario – the confiscation of gold AS HAPPENED IN WORLD WAR II. 5) Imposition of capital controls etc.; 6) Legislations that will compel most daily commercial transactions to be conducted through Debit and or Credit Cards; 7) Legislations to make it a criminal offence for any contraventions of the above.


Maintain a bank balance sufficient to enable you to comply with the above potential impositions.

Start diversifying your assets away from dollar assets. Have foreign currencies in sufficient quantities in those jurisdictions where the above anticipated impositions are least likely to be implemented.


There will be a financial tsunami (round two) the likes of which the world has never seen.

Global banks will collapse!

Be ready.

SwingForce's picture

Whoa, buddy, don't drop the ball after #8) The Banks got made WHOLE for their losses, yet CONTINUE to repossess properties they ARE NO LONGER ON THE HOOK FOR! The Toxic Paper was bought, the shitty mortgages were put to FNMA (and they don't even know it) The Taxpayers Bailed out FNMA/FHLMC, WHY ARE THERE FORECLOSURES? These banks got paid back every penny they lent, PLUS more every day from POMO etc.

NO MORE MONEY FOR THE BANKS! Give out $100 bills to everyone on line at Home Depot & Lowes, 24/7 for the next 100 years and you still wouldn't give away more than Henry "TREASON is ME" Paulson did!

You need to re-write your comments with an Alternate-Ending like Back to the Future part 2, "Let me give you a nickel's worth of free advice", Biff=Bernanke ha!

SwingForce's picture

Do you know Hugh Jass?  Hey, juss' kiddin'. I was talking to Howie Feltersnatch the other day, and Naomi Prins' "IT TAKES A PILLAGE" says the gov't has spent as much money on the banks as it would have taken to pay off everybody's mortgage in America, plus buy houses for those who couldn't afford, PLUS pay their healthcare premiums.

So, if I did not get any of that money, why would I agree to co-sign the loan? Congress is killing us (oops, I meant the taxpayers, not me- I don't pay taxes). 

Take a look from the bottom up, because nothing makes sense from the bottom down- you admitted it in your post. 


BOTTOM LINE for EVERYBODY: With all this money floating around, WHY ARE WE STILL IN DEBT????????????????????????????

Hugh G Rection's picture

At this point going Galt may be the only solution.

Michael's picture

I do a modification on the John Galt model.

I execute a denial of personal service attack on the system every few years.

I take long sabbaticals between jobs when I don't need to earn any more money for a while and decide to quit working for whoever.

The last 3 denial of service sabbaticals were 1, 2, and 5 years between jobs respectively in the last 22 years.

I am currently working for the past 2 months but I expect my next denial of service sabbatical to be at least 7 years.

I am John Galt Modified.

grekko's picture

You may be correct.  I only have one question...Who is John Galt?

jeff montanye's picture

naomi is right, as are you and hugh, except possibly where hugh says no other solution is/was possible (than qe2 and by extension qe3...n).  perhaps politically difficult at the time (or now) the reorganization/restructuring of the financial sector would have been faster to a durable economic recovery, cheaper for taxpayers and bondholders of sovereign debt (even if tougher, initially, for bank bond holders) and far more just to the citizenry.  see for elegant detail.

Punderoso's picture

Why are we still in debt?......Because US money is not commodity money, instead it is a trashed/debased federal reserve note which represents debt, the more money floating around equates to more debt, that is what happens when you transform a country's currency into a financial debt instrument.  Solution: take away the monopoly the federal reserve has over the US currency, let the free market determine what the currency used will be rather than a rent seeking corrupt central bank entwine itself with government to shove a worthless currency down out throats through force and fraud.  Make sure your gold and silver holdings are substantial before this occurs.

Oh regional Indian's picture

Why Swingforce, I thought that would be an elementary my dear W question here, ne?


There is no real "Money" in the "monetary" system, only Currency (remember all currencies float in an Impex world, regardless of their being pegged or free) exists.

Money is a confusing catch-all.

There is currency and there is wealth.

The wealth has been migrating upwards at an astronomically compounding rate at th esame time watching the debt hammer race towards the proletariat in the opposite direction.

Geometric progression people. No denying it, no turning it away, no turnign away from it.

The only question is, how do you find the perfect "reach" in such a headwind?


boiltherich's picture

"Let me explain: A House was sold for say US$500,000. Borrower has a mortgage of US$450,000 or more. The house is now worth US$200,000 or less. Multiply this by the millions of houses sold between 2000 and 2008 and you will appreciate the extent of the financial black-hole. There is no way that any of the global banks can get out of this gigantic mess. And there is also no way that the FED and the global central bankers through QE can continue to buy such toxic wastes without showing their hands and exposing the lie that these banks are solvent."


Let me explain, as I have several times already and will as long as it takes to get people to understand.  When a bank lent out a $450,000 mortgage on that hypothetical $500,000 house you mention above it made a book entry in the asset column for $1,350,000 (total of monthly P+I x 360 monthly payments give or take depending on the rate of I).  NOW multiply by millions of houses with many more to come and you start to see, but it gets worse because the difference between an asset of 1.35 million and a liability which is represented by the house they now own less possible recapture of a fraction of that through auction on the courthouse steps is the original principal less recapture, another quarter million in the hypothetical above, for a true liability of over a million and a half for that one house.  But it gets worse because they collateralized these with as much as 40 to 1 leverage expecting arcane derivatives they created for the eventual need to buy back the fraction that was not taken care of by inflation over 30 years.   

Scoted's picture

Sorry can you just explain more clearly - not educated in economics or finance.

1. How does an asset will book value of $1,350,000 then become a liabililty of $1,600,000 if you can sell the house for auction at $250,000, thus making the liability $1,100,000

2. What do you mean by 'collateralized these with as much as 40 to 1 leverage'. Are you saying that the debt was financed by $40 lent for every $1 of cash in the banks safe?



boiltherich's picture

You understand why the bank books the mortgage as an asset right?  Because it will produce an income stream of 360 payments over a period of 30 years that is equal to the principal plus interest, usually about 300% of the original loan.  If the homeowner walks away that asset is lost, the asset they book is NOT the house worth x dollars, it is the mortgage and the stream of all payments the mortgage entitles them to, but because the bank does not "own" a house, it only has a lien against it till it exercises it's right to take the house in foreclosure for non payment, so what we now have is a loss of the 1.35 million asset (mortgage) they had already booked at the 1.35mm. 

If they follow up and actually take the house in foreclosure they now will own the house which they list as a liability at the remaining principal balance of the mortgage plus other account arrears and legal fees and late payments, etc., having written off the 30 years of interest they now cannot expect, and the property will generate some future income when sold at auction, if sold at auction, which will offset some of the liability they just posted, the difference between +1.35 million asset and -400or so thousand liability is 1.75 (+/- depending on all the variables like late payments and remaining principal) million. 

In overly simple terms, if you wake this morning with 1.35 million in your checking account and I come along and take enough of that from you so that your balance at the end of the day is -400,000 then how much have your fortunes gone down in a day?  By both the +1,350,000 AND the -400,000.  As I said above, eventually the house will be sold for it's new market value of 200k which then will offset some of that loss, but that is as hypothetical as the house in the original example.  In my case I mailed the keys back a year ago and they have not only cancelled the sale twice they have now cancelled the foreclosure.  This is because (I believe) they cannot take the book loss entry of both the +360 payments of P&I and the net of the loss of the sale of the house at market price from the balance they say I owe.  When they foreclosed they had to book the loss of the mortgage and list the house as a liability, huge hit, by cancelling the foreclosure they cancel the book entry of such a loss, now at least on paper they show an expectation that I will pay them 360,000 for a house I can't sell for 70.  RIGHT! 

There is my house, if auctioned today it would fetch about 59-69,000, but they say I would owe them 152,000 and change to clear the account and get the deed, so their loss is the 360 payments at 1000 per month, plus the difference between the 152 and what they could get at auction for the house.  And this is part of the problem, the banks book all future income from a loan on the day you sign the commitment as if you already made all payments.  This is where many people are vastly misunderstanding the real depth of the crisis. 

Also, the general public is not as well educated in finance and accounting as most ZH readers are, they have little to no clue of double entry bookkeeping or time value of money.  The banks also booked upon closing as an asset the investment proceeds they expected to generate from the income stream you will hand them on a monthly basis, as you and many others make your payments they expect to compound that by lending it back out to other borrowers at a hefty margin.  All of that is lost as well. 

As to the 40 to 1 leverage of the CDO's and all the other alphabet soup of derivatives they sold based upon the mortgages, I think that is pretty well the consensus in the finance industry (other ZH readers correct me if I am mistaken) they created tranches of triple A rated "investment grade" mortgage backed bonds and other SIV's that they claimed were worth xyz$$$ based upon the full value of the total number of expected payments, and sold the rights to collect that income stream to many people and entities, like the Norwegian pension fund, Calpers, insurance companies - which need a steady stream of income, when they knew full well that the loans inside the portfolios were dogs that would never pay off.  But they did way more than that, they sliced and diced the mortgages so part of your mortgage might be in one trancheof a CDO, while others might be sold outright to other banks, like carving up a pig.  I say consensus because the whole mess is so murky nobody really knows what all was done or the final financial impact, not even the bankers themselves.  They were very cavalier with accounting standards to the point where the banks themselves and even the best forensic accountants can't untangle the Gordian knot of what was done. 

Enter Linda Greene, the banks knew that what they had done had so compromised the trail of mortgage ownership that the courts were beginning to simply void mortgages entirely, in effect giving dwellings free and clear to their residents.  So the banks used the name of one contract hired employee to sign an impossible number of documents claiming that the custody trail of mortgage paperwork was intact and entirely as the law requires, problem is that they are forgeries, in most cases in most states by now the mere presence of the name Linda Greene on any mortgage document is equal to an admission by your bank that they not only lost control of your mortgage but engaged in a criminal cover up of that fact. 

On that score it is part of why homeowners say the banks do not own the mortgages, because they were carved up to the point that nobody can prove who owns what.  They even made investment vehicles that were sold like stocks.  And then those instruments based on the mortgages were sold over and over adding leverage every time.  Like the tulip mania it all had to collapse eventually.  And to make matters worse they all bought "insurance" against the eventual collapse, so monoline insurers where going toes up, AIG!  Only cost the taxpayers about 200 billion there that we know of.  And yet it gets worse, as they sold everyone that could rub two dimes together this fantastic safe new investment they were also shorting them on their own accounts because they KNEW these turkeys would not fly.

Did I leave anything out guys?  The more you look into it the larger and dirtier it gets.  But most people who do not understand how banks book their assets and liabilities tend to think very arithmetically as they would with their own checking account.  In reality the entries are algebraic and time value lends a geometric aspect. 

The latest bit is that as panic was spreading a few years back over all this - the FIRE industry was so well fucked by all the theft and fraud - that governments not knowing then the depth of the carnage started to guarantee their financial institutions depositors because if there was a run on banks it would be deficit funded governments that could no longer borrow to run the world.  Then the governments found out just how bad the situation really was, too late because by then the taxpayers were already on the hook for all that crime.  Greece, Ireland, Portugal, already had their economies euthanized this way and now are on the equivalent of welfare only given to them as a fireman would cut a firebreak in the path of a wildfire. 

Jaciems's picture

wow great explanation, thanks

hey Tyler, how bout some kind of thumbs up function to make it easier to find posts with substance, something so that they stand out over the usual post by 13y olds ending with BITCHEZ!!!!111oneoneone

Jerome Lester Horwitz's picture

Thank you for a concise, understandable explanation to an overwhelmingly complex problem. I have a question. How does fractional reserve lending figure in to what the banks actually lose? I understand why they would claim a loss on whatever P+I they don't receive that they expected but in this given scenario what was the banks actual concrete loss from what they initially borrowed the mortgage holder? Or does it not matter because it is irrelevant?

boiltherich's picture

"How does fractional reserve lending figure in to what the banks actually lose?"  I don't think fractional reserve lending is irrelevant Jerome, but it is a whole other question worthy of a full book (and there are some good ones out there) but to answer the key part of your question "...figure into what the banks actually lose?"  All economics and finance in the world today is based upon fractional reserve banking, it is the engine inside of fiat currency. 

Banks by themselves produce very little of economic value, there was a time when they did serve as a great repository for the wealth of the public which was a service of some small part of the economy, but remember the three requirements that money must serve in order to be money, unit of account, medium of exchange, and store of value; before fiat was the legal tender of the world we had real money and the banking system was little more than vault services, but they also tended to make the functions of money less unwieldy.  They made safekeeping at least of larger fortunes much easier, they provided a paper trail for the owners of the wealth, proof of the wealth I suppose you would say, and accounting of the ins and outs of the money flows.  As central repositories they helped safeguard the store of value function because without centralized safekeeping in a world where all wealth would otherwise have to held individually in house safes, coffee cans buried in the garden, etc. nobody would have any idea at all of the aggregate size of our collective wealth, and in order for anything to serve as a store of wealth one has to know approximately how much of that wealth is out there.  To simplify, if we all used gold as tender but NOBODY had any idea how much aggregate gold was in the economy how would you assign a rational value to that gold?  In order to be a store of value, or unit of account for that matter one has to have some idea of the scarcity. 

So if banks essentially have nothing of their own real wealth in the game and provide only marginal economic value to those that do, then the bottom line answer is they also can have no real losses (of their own anyway).  

In the case of modern banks in the "housing crisis" it is all about accounting and sticking losses to the taxpayers, in my own case the house I made an offer on and requested a mortgage for, the original mortgage broker was a company called Eagle Mortgage, but they did not put up the $132,147 dollars I originally signed my life away for, that amount came from a GSE called Ginny Mae.  Eagle then sold the whole package to Chase less than two weeks later.  Chase "bought" the right to collect 986.58 a month for 360 months and the right to place a lien on the property till every dime was paid.  They then started to slice and dice my loan into little hunks to be sold to investors.  But none of these companies actually put up the original money, they were only obligated to repay Ginny Mae over the long run which if they did not the government would end up making whole at least nominally with fiat. 

They had the right to repossess my home but their real losses in the end was nothing (nothing real anyway, because of double entry bookkeeping they did have to have an equal and opposite offsetting book entry for the asset, but that would have been some wordy account, possibly a negative liability something like the loan loss reserve account for possible future losses, it did not matter where they stuck the offsetting entry or what they called it because in the aggregate in a healthy banking system they would never have to utilize it, and in any case it would decrease with each payment), they were in fact only a loan servicing system that used the fractional reserve system to leverage the asset (total of 360 payments).  This is all doubly true in my case since the original money to buy my house originated from Ginny Mae and the mortgage was 100% guaranteed by the USDA Rural Development program, when (if ever) Chase sells the foreclosed house at auction they will subtract that sale proceed from what they claim I owe and the taxpayer directly will pick up the tab for the difference, or the USDA will simply exchange a credit to the bank for the total the bank says I owe and get the deed in return making you the new owner of the house.  At the rate things are moving I expect that house will be moldering into dust by the time the taxpayer moves in.

To sum it up, the banks would have to have real money of their own on the table in order to have real losses, all those paper and electronic losses on their balance sheets are essentially fictions of accounting.  The real losses were to those that bought into the CDO's, SIV's, MBS's, Etc.'s which are now worthless, as well as to the taxpayers who bailed the bankers out to the tune of trillions, and to the whole world which is now paying for it all via the stealth tax of inflation triggered by all the "printing" of new fiat to cover it all. 

The last thing I want to leave you with is a reminder that most of us can use from time to time, ECON 101, money (fiat anyway) is not created when it is "printed" up, it is created when it is borrowed/lent.  Money is only destroyed by removal from circulation (zero velocity).  It is for that reason I have always said that the banks counterfeited our dollar into utter uselessness.  They have borrowed/lent so many trillions - and if you count derivatives quadrillions of dollars that are yet to be expressed in the general economy, but must eventually be, then there are only two possible outcomes; that credit/money will either be monetized so as to trigger the most massive and rapid hyperinflation in human history, or all of the borrowing/lending will have to be defaulted upon triggering the most massive and rapid hyperdeflation.  At the moment the two are at war with each other, some refer to it as extend and pretend, but one day soon one side will gain the upper hand.  With computers involved it could happen so suddenly that the whole thing could be over and collapsed in the space of minutes.  Both require that the fiat US dollar (the FRN and by extension all other fiat because all other fiat is so closely entangled to the FRN as reserve currency) will one day have to be replaced because it will no longer serve the essential purposes of money as pointed out above.  Will it be just another new fiat?  Do the same thing over from scratch but reset all the clocks to zero with the promise of being more responsible this time?  I hope not because that would mean Timmy G and Ben B and B Obama or their future counterparts as well as the eternal Goldman and lesser such bankers will be the ones to assess the value of everything from your house to the food on your plate to your hourly labor, then assign your share in the new money.  And anyway fiat in a fractional reserve system would just start all over again with no different outcome, it can't be different.  It would be a total and complete abrogation of market economics.

Look to history for an example, the mark in Germany.  The government created the papiermark in 1914 when they decoupled from gold at the start of WWI, it was used to keep credit flowing in the 20's, for a time the credit (fiat) creation made Germany boom right along with the UK and America (we call it the wealth effect which is essentially just speeding up velocity and devaluing the cash), but we all saw what happened as they lost control of the issuance of credit, wheelbarrows filled with cash in which the wheelbarrow was worth more than the money.  Their answer, and it worked (possibly because of dour German resolve to fix the situation) was to create a new currency that was hybrid fiat but backed by German land and factories, the rentenmark.  It reset the clocks to the tune of one rentenmark to one trillion papiermarks.  It worked well enough for them to reintroduce a reichsmark in 24, but the economy also tanked very badly giving rise to many fringe elements and the rest is history.

Chuck Walla's picture

Boiltherich, thank you for one of the best explanations of the complex yet. It has helped me get a better handle and spurred me to acquire more PM.

cdskiller's picture

+1 Fantastic. That's what I'm talking about.

CD's picture

+ultraplus. Thanks for that well-put-together summary. Copy/pasting (with attribution) to as many as might possibly listen.

euclidean's picture

Hugh, stop with no.1. All the global banks were up to their eye-balls in toxic assets. Global? Not initially, but eventually yes.

The "singular source" of toxicity was fraudulent US real estate. Knowingly 'rated' AAA and sold by esteemed US institutions as caviar now known to be cow shit.

Bernanke, like his dimwitted predecssor is now obligated to 'pay back' the world. You don't realise it yet, but your arse is already owned.

How do you think 'global' banks first got ahold of toxic US cowshit?

Scoted's picture

Haven't the banks been buying stocks to make a quick return on their money, rather than the poor returns that are made on ordinary loans. Thus allowing then to beef up there balance sheet

srelf's picture

Hugh G Rection:


"When the ball hits the ceiling fan, sometime early 2011 at the earliest, there will be massive bank runs."

You meant 2012? Right? 2013?


Hugh G Rection's picture

A little dated, but I did say "early 2011 at the earliest".


2012? Not sure they can keep up the charade another 7 months.

DaveyJones's picture

agree.. and it's that "anytime" feeling that gives me the jitters and makes me plant seeds. 

Michael's picture

Mmmmm. Debt Saturation.

I love it when my plans come together. Sorry.

The beast will soon be starved to death. It was the only way to kill it.

SwingForce's picture

Sorry, cutie, if you've been watching the bid-to-covers you'd see they are falling all over themselves to lend us money. No starving today. Keyword: AUCTION

max2205's picture

Don't buy the dip, it's too late folks. Look at the chart.

The Navigator's picture

Forget the dip, buy while you can - FRNs are meaningless and the exchange rate for FRNs to PMs is meaningless. Accumulate PMs while you can. FRNs = monopoly money. That's my take on this article AND on my understanding of current financial, economic, & political affairs.

StychoKiller's picture

Both the Decepticrats and the Republicons are holding losing hands, and trying to bluff the other party into folding:  Raise the Debt ceiling with NO meaningful cuts AND tax increases is what the Decepticrats want; raising the debt ceiling with entitlement reform/cuts AND NO tax increases is what the Republicons want.  What's needed:  Lowering the debt ceiling, entitlement cuts AND reforms AND lowering of taxes!

What we'll probably get:  Raising the debt ceiling, a PROMISE of entitlement cuts/reforms (sometime after 2012, of course) AND tax increases right away.

No matter what happens to the debt ceiling, the markets are gonna sell off -- think about it.

DoChenRollingBearing's picture

Well, yes, but I am glad to have read the long version.  Fantastic article.


EDIT: Great picture of Obama, with an AK-47, not the American gun...

Live_Free's picture


I do not have your email unfortunately, and I also would love to read your blog.

How can I be approved?

tekhneek's picture

Take his username... append to it.