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Guest Post: The Fed's Most Dangerous Game: Checkmate

Tyler Durden's picture


Submitted by Charles Hugh Smith from Of Two Minds

The Fed's Most Dangerous Game: Checkmate

The Fed can only choose the least-worst option now: either destroy the real economy by sinking the dollar below support and unleashing the Inflation Monster, or abandon the "risk trade" stock market rally.

The Fed's game plan--sink the U.S. dollar to goose corporate profits, reinflate asset prices and create "modest inflation"--is now the most dangerous game on Earth. As overleveraged assets from real estate to stocks imploded in 2008 and early 2009, the Federal Reserve rushed to flood the global economy with zero-interest dollars. This did a number of things the Fed reckoned were necessary:

1. It gave U.S. banks and other insolvent financial institutions an unlimited pool of money to borrow at zero interest and leave on deposit at the Fed, where it earned risk-free interest.

2. It enabled a vast global "carry trade" in dollars: speculators could borrow unlimited dollars at no cost, and then deploy the cash around the world to chase higher yields in stocks, commodities, etc.

3. It allowed banks to lend profitably in the U.S., as their cost of money was reduced to essentially zero, and to pour "hot money" into U.S. stocks, creating a virtuous cycle of ever-rising equity prices.

4. With the bulk of U.S. corporations' growth and earnings coming from overseas sales, then a plummeting dollar boosted their profits effortlessly, further goosing U.S. stocks.

5. With savings earning nothing, U.S. investors were driven into the "risk trades" of the stock market and commodities, a flow of funds which reinflated asset bubbles. This reinflation was critical to foster the appearance of widespread "recovery" via the "wealth effect" of rising asset prices.

6. A rising stock market not only offered an illusion of "growth" but it bailed out pension funds and set the stage for Wall Street to reap billions of dollars from the resurgence of mergers and acquisitions, IPOs and derivatives.

The basic idea was to extend the game plan which had worked in the last banking crisis in the early 1980s: don't force the banks to declare their losses, but "extend and pretend" while offering them risk-free ways to bank billions in profits. The goal was to enable the banks to recapitalize "painlessly" on the backs of consumers and taxpayers.

The other goal of the plan was to create some modest inflation by brute-force depreciation of the nation's currency. This inflation would be "good" because it would enable debtors to pay off their debts with cheaper dollars, and it would also serve to reinvigorate the "animal spirits" of borrowing and spending the Fed views as the bedrock of the "permanent growth" economy.

If you're confident that your cash will be worth less next year, you're highly incentivized to spend it now rather than see its purchasing power decline.

But in choosing to depreciate the dollar, the Fed engaged in a high-stakes game with potentially devastating consequences. By pushing the dollar down to near-historic lows, the Fed now risks a destabilizing criticality: if the dollar breaks key support levels, then traders and holders everywhere will have great uncertainties about how low it might drop. That will encourage them to sell their dollars immediately rather than hold on to find out how low it might fall.

As we can see in this chart, the dollar's decline has not occurred in a vaccum: when the dollar declines, oil and gasoline shoot up. The dollar and oil (and other essential commodities) are on a see-saw, for oil exporters simply raise prices to compensate for the loss of purchasing power as the dollar declines. (Chart courtesy of

The Fed is now trapped: if it crushes the dollar any lower, then oil will jump toward its 2008 highs around $140/barrel--a level that triggers recession in the "real" U.S. economy. A recession will disembowel the "recovery" and all the rest of the Fed's carefully nurtured props of "prosperity."

The unintended consequences of the Fed's inflationary plan to depreciate the dollar is evident everywhere in skyrocketing food and energy costs. Destroying the dollar has sparked destabilizing global inflation which threatens to spin out of control.

But if they let the dollar rise, then their precious stock market rally implodes. And what's left of the mirage of "recovery" if the "wealth effect" evaporates? Zip, zero, nada.

Here is a long-term chart of the dollar, courtesy of Harun I. I have added a few notes.

Note the long-term downtrend. No wonder 97% of the pundits and punters are bearish. The "line in the sand" is not far below current levels: if the Fed pushes the dollar below this level, technically there is no visible support, and oil will be on its way to $200/barrel, far past the point it pushes the economy into recession.

Many technicians have noted the wedge/flag pattern in the dollar's recent action. Price usually breaks out of a flag in a major move either up or down.

Also of interest is the extended period of indecision traced out between 1988-1994. In a macro perspective, this mirrored the trends and counter-trends in the U.S. and global economy.

The dollar has again traced out a similar period of indecision since 2004--roughly seven years. That suggests the possibility that a key inflection point is close at hand--the same conclusion drawn from the flag-pennant-wedge formation.

The Fed now has to choose between two bad options: either keep pushing down the dollar and let oil's inevitable rise trigger a recession, or let the dollar recover and watch stocks crater as the "risk trades" reverse.

If the dollar Bears have to cover their short bets, the ensuing rally in the dollar might well be explosive and self-reinforcing. I addressed this possibility in A Contrarian Take on the Dollar's Demise (March 25, 2011).

If the Fed lets the dollar depreciate in an uncontrolled fashion, then we may well end up with the hyper-inflation (loss of faith) that many expect. My question remains: what course of action will benefit those issuing the whispered orders to their lackeys and toadies on the Fed and in Congress? Will a disorderly and disruptive collapse of the dollar serve the Financial Power Elites' best interests? I don't see how it would. Rather, I see it wreaking great damage on their holdings.

Thus it wouldn't surprise me in the least were the Fed to shock the markets with a "surprise" rate increase within the next few weeks or months. Destroying the real economy to maintain the "risk trades" is a foolhardy way to close down a lose-lose position.

Harun sheds additional light on the broader contexts in his commentary:

Have you ever played chess against someone who refuses to resign even though he or she is down so many pieces chances of winning are zero. All they do is keep moving out of check until there is no more room and they are finally checkmated?

What happens if rates rise? At the time of a loan the principle is created, the interest is not, therefore, everyone who needs to borrow tremendous amounts of money to service existing debt (most of western Europe and the US) will not be able to, therefore there will be cascading defaults of unprecedented amounts. Governments would collapse seemingly overnight. If the game is to continue, there must be enough credit expansion create enough "money" to make interest payments and create so called "growth". Which brings us to...

Inflating the currency: As with the chess player above, it merely holds off the inevitable. Why is it "different" this time? Why has the system become so intolerant to the smallest adverse moves? Answer: Leverage. At 1:1 leverage 100 percent has to be lost to achieve ruin. At 1:2 50 percent must be lost. Jump to 1:40 leverage and only a 2 percent loss brings about ruin.

So what is our leverage? First, we must stop this version of off balance sheet accounting. This version of private household accounting keeps off the liability side of its balance sheet the federal deficit. It is also further skewed by dispersing the federal deficit amongst every person in the US. When is the last time a person bought a house and turned to their infant in the stroller happily using its toes as a pacifier and said, "your portion of this mortgage is $25,000.00?"

If total debt, private and public were carried on household balance sheets and divided only among the productive, i.e. employed, the reality of it would change the conversation dramatically. What would be realized is that the US and most of Western Europe is hopelessly over-leveraged and it is only a matter of time before the structural instability created by this leverage manifests in some unpleasant way.

And no, the answer does not lie in a one world currency. Without getting rid of current levels of debt we would run into Dr. Bartlett's analogy of microbes doubling every minute in a bottle. How much time would it take to fill three more bottles. Well, in the first minute the first new bottle would be full, and in the next minute the two remaining bottles would be full (remember, they are doubling). So if debt levels remain the same debt must double in order to service existing debt and providing growth.

This is why California and other states keep running into problems they thought they fixed. While they make minimalist cuts to spending those cuts are outstripped by the exponential growth of the interest on existing debt. This is also why the current deal in congress is an insult to every intelligent adult in America. Interest on the debt will consume that $33 billion spending cut in no time at all.

BTW, this is the same reason why discovering a brand new super-giant oil field will not matter if demand growth continues at a constant rate. Any and all growth is exponential and therefore will continuously double at some point.

The DXY yearly chart (not shown) shows that bulls have not been able to force a test of the previous three year highs. The quarterly chart shows bears have been able to push price down breaking quarterly lows to important support. What happens next depends. If historical support is broken then the probability increases that price will continue down and things get really interesting. If support holds or if price dips below support enough to get those stops and then move back up through support turned resistance the probability increases there will be a sharp rally as bears cover. But this tells only a portion of the story.

Look at what has happened while the DXY has been range bound. In the case of energy (and just about all other commodities) the DXY has underperformed dramatically. More specifically if you stayed in cash, the cost of gasoline has gone up four fold since the bottom in 2009.

Do this exercise across the commodity spectrum and the results will be roughly the same. So the question is, how long can can the current course be maintained?

Thank you, Harun. As I wrote Harun, it's Fed Chairman Ben Bernanke's move, but he faces a cruel dilemma: if he moves his king out of check, he will lose his queen.

There are only bad choices left, Mr. Bernanke. That's the consequence of playing the world's most dangerous game with the dollar, grain and oil.


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Mon, 04/11/2011 - 10:12 | 1157550 NOTW777
NOTW777's picture

logical place for a bounce 74.22

Mon, 04/11/2011 - 10:45 | 1157696 Fish Gone Bad
Fish Gone Bad's picture

There is a time lag between when excess money is printed, and prices rise.  To keep that "false prosperity" going, more inflation needs to be created.  I am going to have to go with keep pushing the dollar down.  The US will follow Germany's path and eventually default on its debts, AND then create a new dollar.  Everybody not wiped out by debt will be able to buy their debt back for practically nothing.

Mon, 04/11/2011 - 11:30 | 1157865 redpill
redpill's picture

That is down the road a bit, I think Bernank will find a way to extend until he can finish his term.  At some point it must have become apparent to him that he's trapped, so now the only way out is to stretch things out and hope it is someone else that has to pick up the pieces.

Mon, 04/11/2011 - 12:23 | 1158038 Imminent Crucible
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The best that Bernanke can hope for is to buy a little time with a "surprise" 25 bp increase, or two.  He cannot raise interest rates significantly, because it will force a ballooning of federal debt service costs, wrecking the already exploding budget.

This is silliness: "Destroying the real economy to maintain the "risk trades" is a foolhardy way to close down a lose-lose position."  Yes, except that Bernanke has already destroyed the real economy.  He did it by allowing the banks to create trillions of dollars in derivative losses, and then transferring the bill to workers/taxpayers.

What happened in Sept 2008 was just the blasting cap. The real detonation is only beginning, as more and more debt of all kinds (mortgages, second mortgages, HELOCs, credit card, auto loans) melts down and becomes an unrecoverable loss, and THEN we discover that it was written into a collateralized debt obligation held off-balance sheet by some bank or fund.

Mon, 04/11/2011 - 13:24 | 1158259 66Sexy
66Sexy's picture

It amuses me when articles refer to Bernake "being in trouble..."

The Federal Reserve is a private institution; the term "federal" is a deceptive term.

So, it is really the US government that is in trouble... and the borrowers from the fed.

Not Bernake.

It should be clear that the FED is NOT our friend, and whatever they are doing, the endgame is destruction.

Mon, 04/11/2011 - 10:57 | 1157752 Tulli
Tulli's picture


Here are some sobering numbers out of Portugal this morning:

  1. Over the last 5 exercises, the debt of the Portuguese state went rom 58% GDP to 97% GDP.

  2. The "great deed" of the next government will be to achieve only 3% deficit in 2010. (laugh allowed here).

  3. To reach the goal, the government needs to find 12 Bn EUR.


  4. How much is 12 Bn in portuguese terms?         A) 12 Bn EUR is half of all annual salaries of portuguese state workers          or     B) 12 Bn EUR is 120% of the personal income taxes collected lat year by the government     or    C) 12 Bn EUR is 300% of the income taxes over corporations and businesses collected last year by the government.   It's all good - it will surely happen.


Mon, 04/11/2011 - 18:44 | 1159448 55mph
55mph's picture



"But if they let the dollar rise, then their precious stock market rally implodes. And what's left of the mirage of "recovery" if the "wealth effect" evaporates? Zip, zero, nada."

what will the politicians have to hang their hats on?  it's a very dangerous alternative that could advance wholesale social unrest.   

Mon, 04/11/2011 - 10:14 | 1157551 lookma
lookma's picture

If the Fed ends ZIRP/otherwise halts its massive support of the $ credit market, then we will well end up with the hyper-inflation (loss of faith) that many expect.

Mon, 04/11/2011 - 10:19 | 1157583 AG BCN
AG BCN's picture

tedious football club.

Mon, 04/11/2011 - 10:32 | 1157641 anynonmous
anynonmous's picture

posted earlier

this is worth listening to, from Bloomberg radio very early this morning where Gallo suggests that last week could well have been

"The official beginning of America's Sovereign Debt Crisis"

Mon, 04/11/2011 - 10:36 | 1157668 hedgeless_horseman
hedgeless_horseman's picture

As we can see in this chart, the dollar's decline has not occurred in a vaccum: when the dollar declines, oil and gasoline shoot up.

Let's try to remember, what do we do with a well-defined long-term trading range?

Mon, 04/11/2011 - 12:50 | 1158130 sullymandias
sullymandias's picture


Mon, 04/11/2011 - 10:14 | 1157561 gordengeko
gordengeko's picture

"The Fed can only choose the least-worst option now: either destroy the real economy by sinking the dollar below support and unleashing the Inflation Monster, or abandon the "risk trade" stock market rally."  To keep the majority asleep while prepping for the primaries he can't abandon the risk trade.  Removing the nipple would raise too many questions and infuriate the herd since MSM have been screaming bull market.  Therefore QE3 and illusionary corporate profits are my guess.

Mon, 04/11/2011 - 10:30 | 1157624 spiral_eyes
spiral_eyes's picture

there will be no end to delusion economics 'til the shit hits the fan. they will not give up the ghost. qe3 is a foregone conclusion, and qe infinity 'til china and the arabs stop accepting greenbacks.

Mon, 04/11/2011 - 10:44 | 1157693 LibertyIn2010
LibertyIn2010's picture's as if the FED is purposefully trying to crash the dollar in a ditch so that it could bring our economy into such a terrible crisis that we would be willing to listen to just about anyone claiming to have a "solution" to this crisis.  Of course, that would mean giving up the US $ as the world's reserve currency in exchange for a one world currency.  Hmmm...a solution they will claim will solve our money problems as well as those in the EU.  However, this will be just another thinly veiled effort to consolidate more power and money in the hands of the elite who control the world.

I believe I read this story in a book once.

Mon, 04/11/2011 - 11:34 | 1157885 DosZap
DosZap's picture


Mon, 04/11/2011 - 12:14 | 1158006 Bob Sponge
Bob Sponge's picture

....and further enslave the masses.

Mon, 04/11/2011 - 12:46 | 1158108 Blotsky
Blotsky's picture

I wish it were just a story in just another "book". But if anyone has read "that Book", they will come to see exactly how this story plays out.

None of what is happening, or is to come, surprises me, but I cant say that it isnt without it's woe.

Mon, 04/11/2011 - 10:54 | 1157733 EscapeKey
EscapeKey's picture

Delusion economics?

Mervyn King has stated UK above-target inflation has been "temporary"... for 4 years running!

Mon, 04/11/2011 - 11:08 | 1157793 gordengeko
gordengeko's picture

Seems they are grasping at straws now.  You can bet there are major talks going on right now behind the curtain.  I'm betting silver is a nice little thorn in their side right now fucking up their plans a little.

Mon, 04/11/2011 - 11:21 | 1157835 Arthor Bearing
Arthor Bearing's picture

Central banking has become a game of Jenga, a house of cards. It'll either fall one way, or the other, but it definitely won't continue to stand long.

Mon, 04/11/2011 - 11:36 | 1157888 Snidley Whipsnae
Snidley Whipsnae's picture

GG, lest we not forget; Bill Gross has already made a major move to divest long dated bonds at PIMCO. I doubt Bill made this move without some inside info about near/mid term Fed moves.

Mon, 04/11/2011 - 11:29 | 1157861 masterinchancery
masterinchancery's picture

Which could happen almost any time.

Mon, 04/11/2011 - 10:52 | 1157736 RealitiveMind
RealitiveMind's picture

"Keep the majority asleep", a fine sleep it is.

I found myself getting sucked in to the Ponzai for a moment yesterday while looking at the retirement accounts.  Well sure, they are in all physical gold and silver but still, you have a simulated emotional moment where you think, hey everything is doing OK, we are going to be fine.  Mandy is on the TV showing you all the green squares and you feel good, back to sleeeep.

But in reality, it would be like me telling my son to go out back and practice catching falling knives, his hands get all cut up, I take him to the hospital and they say it's child abuse.  When in fact, that is what Ben is doing to all the kids, or is he throwing knives at them?


I remember shopping for my first home in 1979 with interest rates around 18.5% and listening to all the wise elders telling me that real estate never goes down in value, blah, blah, blah.  Ironically, I went and bought a 45 ft sailboat to live on which everyone told me will go down in value.  Even though I sold it years ago, the same boat sells for about the same price now.  Gee this is fun.

Mon, 04/11/2011 - 12:52 | 1158141 B9K9
B9K9's picture

All the "wise elders" don't know jack-shit. Even in 1979, a 70 year old (born in 1909) would know absolutely nothing about why population & output had miraculously been climbing for the prior 100 years. All they could do would be to project their own experiences forward assuming the same set of circumstances.

That goes double for 70 year olds today (born 1941). They know nothing from experience other than that America stood alone (1945-1973) during the precise period of peak oil production. No one, nowhere, understands the role of fossil fuels, population, production & banking (ie interest covered by output).

Being part of the ZH crowd and knowing these things also doesn't get you jack-shit unless you're willing to act on it. PMs are only a start, not a windfall trading opportunity.

Mon, 04/11/2011 - 12:00 | 1157966 tawdzilla
tawdzilla's picture

"The Fed can only choose the least-worst option now: either destroy the real economy by sinking the dollar below support and unleashing the Inflation Monster, or abandon the "risk trade" stock market rally." To keep the majority asleep while prepping for the primaries he can't abandon the risk trade.  Removing the nipple would raise too many questions and infuriate the herd since MSM have been screaming bull market.  Therefore QE3 and illusionary corporate profits are my guess.

True, but in all actuality the Fed is triple screwed, because even if they choose to continue propping up the "fake plastic tree" stock market, high commodity prices will eventually destroy demand and corporate earnings...which will destroy the stock market.  Stock market gets destoyed either way.  

The only thing QE does is delay the inevitable, and gives TPTB time to prepare for a global reset, which means we still have 1 or 2 pump n dump rallies in the que, before the final mass exodus is upon us.

I'm not sure who is smarter... those who are preparing for the post collapse, or those still making hay while the sunshines in the soon to be defunct economy.  I tend to think playing both sides is the best available option right now.    

Mon, 04/11/2011 - 12:23 | 1158036 Commander Cody
Commander Cody's picture

Agreed, except that the Fed is not triple screwed.  Most Americans are being triple screwed.  The lackeys at the Fed will be told what to do and when so that their controllers can place their bets accordingly and beat the system.  This will continue to occur until the system is no longer able to sustain the wealth transfer.  At that point, it is meaningless to the recipients as they will be long gone from the game and all the rest of us will be holding the bag looking at each other in amazement that such a formerly great country could fall so far so fast.  Who could have foreseen?

CAPTCHA:  33 times one equals?  I don't need my calculator anymore.

Mon, 04/11/2011 - 13:03 | 1158185 tawdzilla
tawdzilla's picture

Thanks for the correction...The Fed is the screwer, not the screwee.

Mon, 04/11/2011 - 10:17 | 1157569 falak pema
falak pema's picture

Good analogy with chess. Better analogy with "green knight" in Monty Python Holy Grail.

He was cut to small pieces all the while saying "I won't yield"...

Ben Bernanke is really in a Monte Python film. But somehow, its not hilarious...

Mon, 04/11/2011 - 10:32 | 1157642 zaknick
zaknick's picture

Yes it is!


The only complaint to watching this great comeuppance is tgat it's taking too long. I want to see the real Great Crash, bond market collapse with screaming yields, defaults squealed everywhere and food stamps and all entitlements cut so that the Mad Max conclusion can begin.

You reap what you sow, imperialists! Choke on it now, bitchez!

Reap the whirlwind!

Mon, 04/11/2011 - 10:45 | 1157694 spiral_eyes
spiral_eyes's picture

it's only funny if you're living in the woods, have guns, ammo, food, water filtration, solar, backup gen, bullion, seeds, etc. i figure less than 1% of zero hedgers fall into that bracket, one in ten-thousand in the general population. i have most (but not all) of the above. as great as it feels when i see silver going >41 when i bought it <10, <15 and <20 when the shit actually hits the fan, i'm gonna be pretty sad. civilization was great while it lasted. 

Mon, 04/11/2011 - 13:38 | 1158304 mach777
mach777's picture

qft. mad max won't be so funny after the first few days....


Mon, 04/11/2011 - 22:34 | 1160139 SweetStevie
SweetStevie's picture

But the whirlwind is indiscriminate.

Mon, 04/11/2011 - 10:16 | 1157573 tek77blu
tek77blu's picture

great radio interview with peter grandich on the collision course the u.s., fed is heading down, and implications for gold, silver, the markets, and social turmoil:

Mon, 04/11/2011 - 10:19 | 1157574 Glasgow Gary
Glasgow Gary's picture

My question remains: what course of action will benefit those issuing the whispered orders to their lackeys and toadies on the Fed and in Congress? Will a disorderly and disruptive collapse of the dollar serve the Financial Power Elites' best interests? I don't see how it would. Rather, I see it wreaking great damage on their holdings.

Charles still doesn't get it. These are not competent people working in their own interests. They are incompetent people working in their own interests. In other words, they have already sunk their own insitutions--the banks and the FED--and its just a waiting game now to the resolution. Charles doesn't seem to understand that the credit bubble itself is the thing that spells the end of the FED.

Or, put another way, all the "powers" that Charles imagines have just as much to lose from deflation. In deflation, the banks crater again and the FED has to monetize Treasuries anyway because international trade stops.

Overall, it really doesn't matter what they do. The USD either breaks because of "weakness" against other assets. Or, the USD breaks because the US is going down the tubes. Nothing can save the USD now, or the treasury market.

Mon, 04/11/2011 - 10:25 | 1157609 Bastiat
Bastiat's picture

Well said.

Mon, 04/11/2011 - 10:27 | 1157619 Misean
Misean's picture

No argument here.

Mon, 04/11/2011 - 10:53 | 1157743 Oh regional Indian
Oh regional Indian's picture

GlasgowG, it might be an over-simplification to consider those at the helm incompetent.

They are hand-picked players to bring a long running game to its illogical but pre-determined conclusion. They may be psychopathic, sociopathic, insensitive, selfish, but these are not incompetent people.

In fact, I'd go as far as to say, they are the best at their game. if they were incompetent, they would have lost control a long time ago.


Underestimating your opponent is the single biggest mistake you can make in battle.


Mon, 04/11/2011 - 11:41 | 1157907 Gunther
Gunther's picture

The way I see TPTB operating they are excellent at keeping the game going aka kicking the can down the road.
Changing the game to make the economy viable in the long term is something I could not observe at all.
So, they are competent in a limited sense.

The explanation for this behaviour might be that they believe their own propaganda and/ or think very short-term or they care only about their own profit similar to a third-world-cleptocrat.

Mon, 04/11/2011 - 12:08 | 1157996 PierreLegrand
PierreLegrand's picture

Perhaps you don't understand the results the Bernank is striving for?

My money is on he knows exactly what he is doing and this is EXACTLY the result he expected.

Mon, 04/11/2011 - 12:19 | 1158022 Oh regional Indian
Oh regional Indian's picture

My sentiments exactly. These guys know the game. to well.


Mon, 04/11/2011 - 12:50 | 1158134 Hook Line and S...
Hook Line and Sphincter's picture

Many here have not ever really met a true, patient, hustler. There's always a lot of 'losing' to do before the win. Most people do not understand the heart of predation, because they are prey.

Mon, 04/11/2011 - 12:48 | 1158114 ConfusedIdiot
ConfusedIdiot's picture

Agreed PL. The USD is like a cat. Regards, CI.

Mon, 04/11/2011 - 12:40 | 1158093 Spastica Rex
Spastica Rex's picture

I don't buy your argument. The players are just as stupid as you and me, just greedier and meaner. And actually, I don't think they're the "opponents."

"We have met the enemy and he is us"


Mon, 04/11/2011 - 21:57 | 1160033 torabora
torabora's picture

Union General McClellan seriously overestimated his opponents early in the war. If he would have not been so timid he could have at least have taken Richmond and destroyed Lee at Antietam. The War would have continued but not for as long as it did. He made a lot of war profiteers rich.

Mon, 04/11/2011 - 11:40 | 1157894 Josh Randall
Josh Randall's picture

Dollar only gets saved by return to Gold standard (or basket of backing) - the only question for me is how long before they whip that big stick out. I fear they wait until dollar drops below 50 and China drops it's paper like PIMPCO did. But QE 3 is baked in - stimulus the congress doesnt need to approve so that Soetero can point to the stock market during the re-election campaign

Mon, 04/11/2011 - 10:20 | 1157578 BeerGoggles
BeerGoggles's picture

the only flaw is that oil has gone up because of the middle east...not the dollar. Fail.

Mon, 04/11/2011 - 10:27 | 1157614 gordengeko
gordengeko's picture

I agree, I always talk with my friends that know nothing about the markets to get a guage.  They realize the same thing happened before back in 2008 with oil which preceded the market crash.  So a lot of them are questioning the market now because of the gas prices.  I think short term crude dips to 105-110ish.

Mon, 04/11/2011 - 10:45 | 1157697 EscapeKey
EscapeKey's picture

1. Print money, cause inflation.

2. Revolutions in countries, where food expenditures represent a significant percentage of overall spending.

3. Resources of countries in question will be affected.

Mon, 04/11/2011 - 10:19 | 1157582 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

This article is way over simplified. 

What is missing from the philosophy of economics is the fundamental understanding that 1) all resources are finite and 2)  labour is a willing good.  Once these are used as a metric for input costs, neo Keynesian rhetoric falls to the way side.  Neo Keynesianism relies on free labour and thinks of all resources as abundant.  Nothing is further from the truth.

Mon, 04/11/2011 - 10:37 | 1157662 flattrader
flattrader's picture

Oversimplified?  Well, yeah.  This is CHS.

Better to just read  He can do his own charts.

Mon, 04/11/2011 - 10:20 | 1157586 SheepDog-One
SheepDog-One's picture

I say they cling to rallying stocks fraud till the bitter end, that is what keeps the sheeple placated. Theyve been trained to hear that 'The DOW was up x points' and Pavlovian response is 'all is well'.

But for sure the FED is between a rock and a demolition ball.

Mon, 04/11/2011 - 10:28 | 1157626 Misean
Misean's picture

That's what the political class would like to see.

Mon, 04/11/2011 - 10:24 | 1157599 zaknick
zaknick's picture

Why the hell does it take so long???

I want Mad Max: Beyond Amerika now!

Mon, 04/11/2011 - 10:22 | 1157600 SwingForce
SwingForce's picture

"Bailed-out pension funds"? A temporary phenomenon if what you say is true.

Mon, 04/11/2011 - 10:22 | 1157602 Beatscape
Beatscape's picture

The extra question that needs asking, in addition to what hurts the elite power brokers the least, is that the Bernanck is certainly contemplating the fate of his own posterior.  The 2012 election is looming very large, and if the Phed lets the economy tank by shoring up the greenback, then the Bernanck will be held responsible and his job would be in great danger.

I say he continues down the existing path and lets the dollar sink and oil rise.  They have already committed to the double-talk strategy of calling it "headline inflation" and that there is plenty of "slack" in the economy.  Plus, Obama has told the public to suck it up re: higher oil prices.  Remember, the democrats are fully in favor of higher oil prices.  They want to make their green energy alternatives economically viable. 

Mon, 04/11/2011 - 11:43 | 1157902 Eternal Student
Eternal Student's picture

+1. I'd also add that the public has a VERY short collective memory. 6 months max, for the worst items. For example, Eisenhower wanted the Nuremburg trials done within 6 months after the end of WWII. For the explicit reason that people would forget all the horrors of the war after that time, and be less inclined for full prosecution(!). And this was after the most heinous slaughter of modern times. That says a lot.

So they can get away with quite a bit over the next year. The problem with the economy is that it doesn't turn on a dime; it takes a while to change course. So they still have some room to screw around with their demonstrably false economic understanding. After this November though (at least), they'd better get their ducks lined up.

My bet is that Bernake will screw things up again, just in time for the elections. He'll go down in history as having really screwed two sitting Presidents.

Mon, 04/11/2011 - 12:51 | 1158136 Spastica Rex
Spastica Rex's picture

I don't disagree with anything you've suggested. However - it seems to me that high fuel prices are an extremely risky gambit. Americans love their gas hogs and I think will look very kindly to a candidate that wiil promise them cheaper gas and blame the prices on Demo policies.

Mon, 04/11/2011 - 14:21 | 1158430 tawdzilla
tawdzilla's picture

"I say he continues down the existing path and lets the dollar sink and oil rise.  They have already committed to the double-talk strategy of calling it "headline inflation" and that there is plenty of "slack" in the economy.  Plus, Obama has told the public to suck it up re: higher oil prices.  Remember, the democrats are fully in favor of higher oil prices.  They want to make their green energy alternatives economically viable." 

Astute observation, except I think there's one caviat.  Since we are 1+ year away from the real political silly season, the Fed has a small window of opportunity to take their foot off the QE gas pedal (and cover the brake) long enough for a modest stock market correction.  Shortly after panic ensues, the Fed once again steps on the QE gas pedal (to the metal) and the status quo is momentarily preserved before the election.  This strategy ensures political cover because gas prices will temporarily fall, and it silences the Tea Party fiscal hawks who will be portrayed as extreme economy killers.

After that, onward with your long-term strategy of destroying the dollar.

Mon, 04/11/2011 - 10:26 | 1157615 topcallingtroll
topcallingtroll's picture

If obummer had any sense he would open the SDR to accept and provide contract deliveries. Just the mere mention that the sdr is.goung to sell above 100 and buy under 80 would.go a long way. If obama.would put a couple traders in charge the price of oil would go down.

But obummer.doesnt know anything.about trading, investing , or any economic sense. His advice is to trade in your gas guzzler.

Mon, 04/11/2011 - 10:28 | 1157617 Misean
Misean's picture

"What happens if rates rise?...there will be cascading defaults of unprecedented amounts."

Yup. And that's absolutely game over. So, as far as the banksters are concerned, print.

B-Diddy wants to prove printing can stop a depression, his life long goal. He's torn between declaring a self sustaining cycle, and the notion that past printing failures were due to not holding the pedal to the metal long enough.

That both paths end in utter ruin is completely lost on those in power.

Place your bets accordingly.

Mon, 04/11/2011 - 10:28 | 1157627 nevadan
nevadan's picture

Europe is in the other side of the same box.  Maybe JCT will have to take back his rate hike which would give the dollar some relief.

Mon, 04/11/2011 - 10:33 | 1157638 franzpick
franzpick's picture

speculators could borrow unlimited dollars at no cost, and then deploy the cash...

I am envisioning the opposite end result:  assets purchased without financing.  Houses paid for in cash, maybe $25 / sq. ft., or less. 

Mon, 04/11/2011 - 10:34 | 1157643 lolmao500
lolmao500's picture

And when it all comes down, the riots begin... and the ``civil war`` starts between the big government sheeple and those who want to hang the bankers.

Mon, 04/11/2011 - 10:38 | 1157665 Seasmoke
Seasmoke's picture

hope those arent the only 2 sides to choose from, as i hate them both

Mon, 04/11/2011 - 11:46 | 1157896 WaterWings
WaterWings's picture

It will depend on your region. Cities that don't burn to the ground will likely controlled by former police/military. Others will be run by narcos - which are heavily armed and hardly, if ever, in the news stateside - but they are in every city, every town. The reconquista will begin in earnest once a little disunity arises between the lazy, fat, naive gringos. Either way it's going tribal.

¿Habla Español?

Mon, 04/11/2011 - 10:32 | 1157644 Seasmoke
Seasmoke's picture

there are no more pawns left on this chess board

Mon, 04/11/2011 - 10:35 | 1157649 ZeroPoint
ZeroPoint's picture

Inflation is going to happen anyway in an environment where 50% of every dollar spent is borrowed, with no end in sight.

Bernake might slow it's decline slightly, but if nothing changes, then eventually the US won't even be able to pay the interest on it's loans.

The dollar doesn't have much longer.


Mon, 04/11/2011 - 10:41 | 1157658 willien1derland
willien1derland's picture

OK Team ZH a practical REAL ECONOMY example - CONSTRUCTION (EARTHMOVING) EQUIPMENT - despite NOTHING happening in the construction markets the big national rental houses (United Rental, RSC, Hertz, et al NOTE URI & RSC are up triple digits since Aug 2010 & neither have any earnings) have been buying new equipment to reduce their aged rental fleets due to incentives such as accelerated depreciation & other tax incentives (some industry estimates indicate that National Rental Accounts are 50-60% of the demand) as well as export market demand indicative of the weak USD & the emerging market demand - while the US constuction markets record all time low metrics the construction equipment markets are up well over 24% YoY - now to be fair 2009 wasn't a banner year, but, the demand for construction equipment is astronomical - if credit markets contract I cannot imagine what would happen to Construction Equipment manufacturers  - (however, Deere appears to be driven by ag business demand as USDA prospective plantings report released last week show strong planting intentions)

Mon, 04/11/2011 - 12:15 | 1158017 SheepDog-One
SheepDog-One's picture

Whats this 'real economy' you speak of? Here in USSA, we print  the economy.

Mon, 04/11/2011 - 10:35 | 1157664 TexDenim
TexDenim's picture

These two options do not have the same consquences: trashing the dollar could have irreversible repercussions over 10-20 years, whereas variations in oil prices are something we've endured before and survived.

Mon, 04/11/2011 - 10:39 | 1157670 anynonmous
anynonmous's picture

Just now on Bloomberg - Simon Johnson

"The Fiscal Crisis in the US was caused by the banks, not by runaway spending"

"In a crowded field, Jamie Dimon is the most dangerous banker on the planet"



Mon, 04/11/2011 - 10:40 | 1157681 willien1derland
willien1derland's picture

Then we as humans have the right to rid our species of the threat - Send Jamie Dimon to Fukushima on a 'humanitarian' mission - more humane for the US than for the poor Japanese!

Mon, 04/11/2011 - 10:41 | 1157677 ebworthen
ebworthen's picture

They'll raise rates.

The banks can keep their shadow (foreclosed) housing inventory as they don't have to account for it and get easy money at the FED window anyways.

The FED also needs to crush Precious Metals, and as long as they give JP Morgue and their other buddies the early warning - it's all good.

Mon, 04/11/2011 - 10:40 | 1157682 bruinjoe93
bruinjoe93's picture

Tyler, you make it sound like the Fed has a choice.  How is the government going to make up the deficit between tax income and spending outlays?  Can the Fed expect foreigners to purchase all the bonds that get sold?  They are going to have to monetize debt which you know will kill the dollar.

Mon, 04/11/2011 - 10:47 | 1157709 Cole Younger
Cole Younger's picture

The only asset the fed really has is the dollar. That's there business. I think the fed will let everything go to shit, call it transitory, and save there own ass. The government will default on its debt so in the end, it doesn't really matter. 

Mon, 04/11/2011 - 10:42 | 1157692 Thorny Xi
Thorny Xi's picture

I would suspect that the decision will be dependent upon the positions of those whispering it.  Looking at insider selling over the past year vs. buying, and the price runups in non-equity assets, and what Bill Gross has done; intuition says the equity markets will take the hit before an intentional smash down of the dollar. That is a more wide reaching event with more unpredictible consequences, after all. The Fed may have goosed the equity markets, but it did so with the stroke of a key. A worthless dollar, OTOH, would whack a lot of "whisperers" globally.

Mon, 04/11/2011 - 10:45 | 1157695 versatile
versatile's picture

The high oil prices will just push everyone toward more economical cars in the longrun, which will lessen our dependence on oil and probably lower prices.

Mon, 04/11/2011 - 10:53 | 1157735 Roy Bush
Roy Bush's picture

ha ha ha!  If only it were this easy!  We're talking about TOTAL demand destruction due to a collapse of the dollar.  My friend, they better make cars that get 250 miles to the gallon because that's all the average person will be able to afford.  

Mon, 04/11/2011 - 11:04 | 1157778 SheepDog-One
SheepDog-One's picture

Yes higher gas prices will simply make bankrupt unemployed americans buy POS Chevy Volts for $45,000 to ease the pain at the pumps...BRILLIANT!!

Mon, 04/11/2011 - 12:02 | 1157977 Roy Bush
Roy Bush's picture

That won't work either because the cost of the coal to fire the power plants to charge the vChevy Volts will also be prohibitive...

Mon, 04/11/2011 - 13:00 | 1158166 Spastica Rex
Spastica Rex's picture

Jevon's Paradox says it doesn't matter.

Mon, 04/11/2011 - 10:47 | 1157704 MGA_1
MGA_1's picture

You know, the fed could raise the official short term rate and still monetize the debt, but I think they are trapped.  I personally think they are eventually going to have to monetize a large portion of the debt - easiest solution.

Mon, 04/11/2011 - 10:49 | 1157721 Sean7k
Sean7k's picture

Normally, I enjoy Charles Smith, but here- he acts as if there are choices. There are zero choices. 

The US is the largest economy on earth, but it is burdened by the largest debt requirements on earth. This whole game of dollar value is just that- a game.

We cannot raise interest rates. We are already defaulting on debt. Just because no one is making us sell assets to pay the debt, doesn't mean we aren't in default. The FED is printing to cover the difference- who is fooled by this?

The dollar is valued based on how badly someone wants to buy our products and the linkage to oil. Buyers are buying less American products, so the only thing holding up the dollar is liquidity mop up from oil and other commodities. What happens when sellers demand another currency or asset in trade?

The stock market is becoming immaterial, because the gains are measured in a declining currency. The banks net worth is facing the same confrontation. Ultimately, we are looking at the discovery of a new asset for currency supremacy. 

The FED is an empty shell filled with the bluster of the Wizard of OZ. Anyone listening and taking seriously the machinations of the FED are fools. The dollar will find it's real value- there are zero economic reasons that this will be higher- regardless of policy actions of the FED.

Mon, 04/11/2011 - 13:04 | 1158188 Spastica Rex
Spastica Rex's picture

U.S. dollar value is also a function of U.S. miltary power. Maybe war is the endgame.

Mon, 04/11/2011 - 14:49 | 1158517 falak pema
falak pema's picture

Whose the enemy? China? Didn't work with Vietnam, remember? Won't work with China. Period. Dollar falls with or without US guns.

Mon, 04/11/2011 - 15:51 | 1158769 akak
akak's picture

Incorrect, and backward: the power of the US military is a function of the world's acceptance of the US dollar as a reserve currency.  And the trend there is not the friend of the military/industrial complex, for which I can only cheer.

Mon, 04/11/2011 - 11:12 | 1157724 Stuck on Zero
Stuck on Zero's picture

Tough decision at the Fed.  Shall we stabilize the dollar and recover fiscal sanity or shall we steal a few more trillion for the Banksters and all get horribly rich? 

Mon, 04/11/2011 - 10:52 | 1157731 nikku
nikku's picture

The author and others here do not have the mind-set of depository institution bankers--a mind-set that owns stock in the Federal Reserve Bank. The reserve curency, as it is today, even in its weakness is still the overwhelming bulk of deposits (bank liabilities) and the overwhelming currency of their assets. All they need to do is make a spread--and then who the hell cares about the value of the dollar? Well, you may answer, shareholders should. But how many government bailouts are neccessary before we realize it's the very government that wants to maintain the spending status quo that carries the shareholders' risk on all U.S. banks? The saavy banker elites? Their not short silver, my friends--they're already ahead of you!

Mon, 04/11/2011 - 11:53 | 1157745 GoinFawr
GoinFawr's picture

Alternately, the GS alumni that make up the governors of many Central Banks could simply step up the inflation rates on THEIR currencies, helping to sustain the USD illusion.

BOC Mark Carney makes a rate announcement tomorrow. Any guesses as to if he lowers?
(Hint: ask Lloyd)

I mean the loonie has been crushing the USD for quite some time now, yet I have heard precious little talk from the Canucks how this is 'killing their exports', which is the usual cry whenever that happens... funking GS alumnis

Mon, 04/11/2011 - 11:02 | 1157749 pauldia
pauldia's picture

It's going to be a nerve wracking high wire game of posturing, hawkish language, margin hikes, marginal increases with hawkish language toward the future. In essence a magicians game of slight of hand, whereby volatile swings based on emotion frighten holders of risk assets and offer temporary respite for the dollar and bonds. An ebb and flow of disinformation and propaganda from the powers that be and their enablers in the MSM. The real action is behind closed doors in Basel, or some remote Island. America's Sovereign Debt is failed; only the shearing of the sheeple allows a roller coaster serpentine track for many to be ejected prior to the finish line.The next year will have America divided racially (Obama's meeting with Sharpton), and expect public sector Unions to grow more and more caustic, cued from the White House.Wisconsin was choreographed from the Oval office. The Middle East is being choreographed also, but from Teheran to Hizbolla,  Hamas, and the Muslim Brotherhood. As Faber says, war s a likely outcome. My advise is to stay nimble and expect the unexpected from both the Federal Reserve and our President whose rapidly decling approval ratings seem disorderly !Both seemed cornered.

Mon, 04/11/2011 - 10:59 | 1157760 steve from virginia
steve from virginia's picture

While I don't disagree with much of the premise behind CHS's argument, what is missed is that every 'trash' dollar sold is a trash dollar eagerly bought by someone else.

Q: who's buying dollars? Somebody must be and looking for a good deal, too! Maybe it's Donald Trump. He's buying everthing else @ pennies on the trash dollar!

It's the dollar buying that is always left out of the equation; the absence is undermining. As the dollar falls the price of fuel increases until what happens, exactly? "Currency collapse" is the glib answer by analysts ... but what do people use to buy fuel with if not with dollars? There are no other currencies in circulation in the US other than dollars. People buy fuel with dollars or they don't buy fuel at all.

How long does anyone think any sort of economy will last with that state of affairs? What would happen to the price?

What is happening already: people are being priced out of the fuel market! They don't have the currency. Hello!

What is on the way to taking place is a price driven destruction of demand, regardless of the 'real' or inflation adjusted price. Demand destruction leads to debts not paid or serviced which in turn leads to defaults which cuts demand further, debt service further and an accelerating cascade of defaults.

Since the central banks are already 'all in' on liquidity provisions, adding even more renders the central banks irrelevant. Liquidity loses its marginal utility: even with the Fed pumping non- stop a money- panic type deleveraging event takes hold that cannot be stopped.

Right now there is a $100 trillion in debt that cannot be serviced (reality) or repaid. Once the illusion of petroleum delivered endless growth vanishes along with the promised returns, peeps will start dumping this debt for whatever cash they can get for it. If you think Hairpiece Boy is getting deals now, just hang onto your hat, folks!

Every bit of collateral is going to vanish into a rathole and dumped onto the market for cans of beans. That includes gold which has become 'collateral du jour' for finance companies and banks.

The diff between now and 2008 is we all were so much richer then ... and the Fed had a clean balance sheet.



Mon, 04/11/2011 - 11:01 | 1157761 AldousHuxley
AldousHuxley's picture

Mon, 04/11/2011 - 11:02 | 1157768 Life of Illusion
Life of Illusion's picture


Dollar devaluation re-inflation dollar carry trade cycle, it’s a process not an event.  Bankers will trade these mini Fed cycles until interest rates are very high and dollar very low. Bankers will trade these cycles and rebuild balance sheets.

Fed will have public begging for QE 3,4,5,6 after Fed increases interest rates creating just enough disinflation to once again re-inflate. Interest rate hikes trailing higher inflation will go on for few years. Eventually interest rates will be very high.  Bankers will exit inflation trade and invest in long term paper with high rates, sit back and watch the deflation asset crash.

Mon, 04/11/2011 - 11:01 | 1157770 AldousHuxley
AldousHuxley's picture

Mon, 04/11/2011 - 11:02 | 1157771 GOSPLAN HERO
GOSPLAN HERO's picture

Gold and silver -- real money.

Fiat paper currency is anti-money.


Mon, 04/11/2011 - 11:16 | 1157816 Rogerwilco
Rogerwilco's picture

As a nation we consumed more than we produced for forty years. Damn it was fun. What could go wrong?

Mon, 04/11/2011 - 11:17 | 1157828 Ying-Yang
Ying-Yang's picture

Harun sheds additional light on the broader contexts in his commentary:

Have you ever played chess against someone who refuses to resign even though he or she is down so many pieces chances of winning are zero. All they do is keep moving out of check until there is no more room and they are finally checkmated?

In this scenario, you shift to checkmate quickly to avoid stalemate. The speed of which depends if you enjoy your opponent's company. Astute players know how to box in and force checkmate with superior resources.

Poor chess game the Fed is playing and perhaps Bill Gross and others will be further boxing the FED in...

Mon, 04/11/2011 - 11:20 | 1157833 Gimp
Gimp's picture

Teams with poor leaders don't do well ....

Mon, 04/11/2011 - 11:27 | 1157858 AldousHuxley
AldousHuxley's picture

Inflation masks failure by the banker class to allocate wealth efficiently and the political class to lead the country.

Mon, 04/11/2011 - 11:29 | 1157866 paratrooper325
paratrooper325's picture


Mon, 04/11/2011 - 11:29 | 1157867 KingTheoden
KingTheoden's picture

There are only bad choices left, Mr. Bernanke. That's the consequence of playing the world's most dangerous game with the dollar, grain and oil.

This comment is the distilled version.  I think back to WarGames, the film in which Joshua observes that some games have only one winning move.  And that is not to play.

I agree that the banker class would stand to lose during any major inflationary pattern as that would seem to make debts easier to clear, I'm not so sure that the Fed has the flexibility to tighten. 

In addition to wiping out capital gains in the markets, rate hikes would crimp the style of the US government by further pressuring tax receipts and thus widen the deficit.

The only way out would seem to be a managed transition to a new currency, however this would have to wait until after the 2012 elections.

Mon, 04/11/2011 - 11:31 | 1157869 paratrooper325
paratrooper325's picture


Mon, 04/11/2011 - 11:38 | 1157876 Bartanist
Bartanist's picture

IMO, it all depends on the ultimate goal, does it not? We, who are overly focused on economic and monetary issues seem to isolate them from broader social/global issues.

The choice does not appear to be between killing the dollar or killing the economy. The real US economy has been systematically dismanted over the last 20 to 30 years, so that not only is our industrial base weak, but our people are overly dependent on others for their very existence. And, while we, living in our little safe and cared for bubble believing that the principles of the following article are not possible, I would suggest that the actions of recent years are much easier to explain if you believe that there is a plan and it is being executed almost to perfection.

Now, isn't that really what "gods' work is all about?

I tend to give the benefit of the doubt to some self-proclaimed insiders who say that the power elite plan on raising oil to roughly $200/bbl in 2012, which will be brought about through the convenient excuse of chaos in the middle east; which the power elite have created, through their many agents.

The logical conclusion is that the dollar will die and the middle east oil countries will be left bankrupt, having much of their money in dollars deposited in US banks and investments ... but they have oil, no? Yes, but no one will buy it because no one will be able to afford it. The end of cheap oil will kill the global economy and trade ... people will starve and there will be chaos.... all generated by the global elite. The plan is for it to be covered by a smokescreen of economic misdirection until it is too late.

Now, I hope that this will not be the case. I would like to believe that TPTB are just well intended bumbling goofs who are caught in a no win situation. But, I do not believe it.

Mon, 04/11/2011 - 11:32 | 1157877 Geoff-UK
Geoff-UK's picture

Please remove Charles Hugh Smith's posting privileges.

Mon, 04/11/2011 - 11:34 | 1157883 RobotTrader
RobotTrader's picture

Speculation is as rampant as ever.

Hedge fund inflows at another record last month, now there is a total of 1.73 trillion in fiatscos placed in the Gambling Dens....

Mon, 04/11/2011 - 11:43 | 1157911 WaterWings
WaterWings's picture

Nobody wants to go home alone.

Mon, 04/11/2011 - 11:35 | 1157890 rubearish10
rubearish10's picture

It's doubtful that interest rates will rise to spook markets (not yet), even if the flag breaks and DXY trades lower. It's not that simple. 

First, I'm not sure DXY is so important as it once was given the heavy fake Euro weighting. ADXY per Krieger makes more sense to watch and "it" has already broken out.

Second, "it's the economy stupid" slogan remains "in play" and with so much :false" headroom capacity", the USD will be allowed to depreciate much further before anyone claims with evidence that the USD has "collapsed.

Third, the evidence of USD collpase will more likely come from the bond market before oil, even if crude trades in the mid $100's. We didn't have a "fiscal" issue like this in 2008.

The best indicator will be how the 10yr responds to QE3 when it arrives, period..







Mon, 04/11/2011 - 11:38 | 1157897 DavidC
DavidC's picture

If they'd let the TBTFs fail in 2008 and sold the assets at market values to the more responsible banks, he wouldn't be in this position now. It's his and Paulson et als' own doing.


Mon, 04/11/2011 - 12:01 | 1157974 Catullus
Catullus's picture

Exactly. The alternative was no longer being in control of assets. This was/is about control. Not profits or bonuses.

Mon, 04/11/2011 - 11:41 | 1157909 Snidley Whipsnae
Snidley Whipsnae's picture

Let us not forget that Bill Gross at PIMCO has already dumped a lot of treasuries. Would Bill have done this without inside info about future Fed moves? I doubt it...

What Bill did is a 'tell' in poker...

Mon, 04/11/2011 - 11:43 | 1157914 baby_BLYTHE
baby_BLYTHE's picture

A 1964 Kennedy half-dollar is $14.80 melt value. A Roosevelt Dime $2.96 melt value. Of course, that is real money that keeps up with inflation instead of today's money that merely robs you of everything you make or save.

The Government operates in 100% self-interest and in that interest they continually devalue the dollar to devalue their debts so they can continually spend more. In doing this they royally screw the entire population of dollar holders.

Is it going to stop? Never!

Mon, 04/11/2011 - 11:50 | 1157938 sbenard
sbenard's picture

We're toast! Plan and prepare accordingly!

Mon, 04/11/2011 - 11:51 | 1157948 Catullus
Catullus's picture

I'm not confident $140 oil trips the US economy into "recession". Does it cause a margin squeeze? Yes. But you can remedy a margin squeeze by raising the price. I've seen this "oil and energy cause recessions" before. Maybe, but $140 barrel is arbitrary at best and just serves as near-term alarmist point. You generally see a chart with $140/barrel oil from 2008 and the beginning of the equity market collapse. Over-simplified and everyone in the oil and gas industry knows a few players were getting squeezed in 2008. Contributed to recession, but not the cause.

There really is nothing new here. The fed can continue to print and monetize debt or not. Given that everything is correlated now, if the liquidity engine stops, so does too goes the prices of a lot the stuff in the market.

The real question is will the fed stopping printing money and why. My answer is that they can't, they won't, and they don't stop. Rising prices are not a problem for the fed and the banks. It keeps them solvent. They're paying you back in counterfeit money. So long as they continue to do that, they maintain control of assets. All of central banking is about control. When they lose control of the value of the dollar, they'll move to a new form of globalized central banking. This has been the plan for decades.

Mon, 04/11/2011 - 12:01 | 1157968 anynonmous
anynonmous's picture

When they lose control of the value of the dollar, they'll move to a new form of globalized central banking. This has been the plan for decades.


Dudley from his speech quoted in a ZH article from earlier today

The political unrest in the Middle East and North Africa underscores once again the fact that we operate in a shared world economy in which events in one country and region can have large impacts globally. And to support this globalized economy, global financial firms and a global payments and settlement infrastructure are needed to support this activity

Mon, 04/11/2011 - 11:56 | 1157955 Strategery
Strategery's picture

Well, to answer the question you must try to look at it from the point of view of the actor: that is, what would a banker do?  Secondly, a presidential election complicates things, with the White House pressuring the Treasury to keep the game going with the Fed, because Obama can't afford to have the market crash on his watch.  The only real way that we will prevent destruction of the dollar is for REAL pressure to come to bear on the Fed.  That would have to come from Congress, or the judiciary. Ron Paul is the likely candidate, but they have been treating him like a fly.  The only way to make the Fed back down is to make a legitimate threat to repeal the Federal Reserve Act; or from the judiciary in a suit to enjoin the Federal Reserve based first on the constitutionality of delegating such congressional authority to private banker, or in the alternative, to assert that what the Fed is doing is Ultra Vires, or against the law as it applies to the Fed's ability to increase the money supply.

Mon, 04/11/2011 - 12:03 | 1157975 Bicycle Repairman
Bicycle Repairman's picture

QE will continue.  Americans will simply have to tighten their belts.  Oil and gas prices are a problem?  Obama just told you get a car with better gas mileage.  Grain prices got you down?  Eat less meat, and get smarter about what you eat.

So here's the plan: QE continues and JP6 gets told to "suck it up and cope".  What's that?  You won't vote for Obama?  Well then you get Palin and in-your-face austerity.

Can't say I like it much, but everyone here seems to assume that they cannot let inflation continue.  Sure they can.  They've done before.  We're going to get a decade of 5%-10% annual inflation.

Mon, 04/11/2011 - 12:05 | 1157980 Milton Waddams
Milton Waddams's picture

Most don't get it-- the game is to torture the labrats with inflation to the point that they are begging for a recession.  Such is life on the downward slope of the energy supply curve.

Mon, 04/11/2011 - 12:05 | 1157982 Chuck Walla
Chuck Walla's picture

How is he so sure that any of this is "uninteded consequences" when Hope & Change are in full blow in the White House?

"A revolution is impossible without a revolutionary situation..."

V. Lenin

Mon, 04/11/2011 - 12:06 | 1157990 AldousHuxley
AldousHuxley's picture

History tells us that uneducated populace can take up to 15-20% inflation ann. rate. without any violent revolutions.

History also tells us that uneducated populace, under great distress, eventually self-educates and learns of the truth.

The key turning point will be for the masses to realize this and act before government tyrants turns its military against its own people.


Mon, 04/11/2011 - 12:26 | 1158026 baby_BLYTHE
baby_BLYTHE's picture

The Spark Notes Version of...

Andrew Jackson's historic defeat of the Second Bank of the United States

As his term continued, Jackson truly grew a desire to crush the Second Bank of the United States. Over time he had decided that it could not continue as it was, and that it did not warrant reform. It must be destroyed. Jackson's reason for this conclusion was an amalgamation of his past financial problems, his views on states' rights, and his Tennessee roots. The Second Bank centralized financial might, jeopardizing economic stability; it served as a monopoly on fiscal policy, but it did not answer to anyone within the government. Above any principled concerns, however, the Bank became a political battle.
 Congress chartered the Second Bank in 1816 for a twenty-year period, giving it thirty-five million dollars in startup funds. A board of twenty-five directors controlled the Bank, but only five were publicly appointed by the President–the rest came from stockholders. The directors controlled branches, invested funds, and oversaw operations. Over time, the Bank proved quite good at managing credit and providing profits for the stockholders and government–perhaps too good. In 1819, the Bank had caused a financial panic by calling in credit from smaller state banks, forcing many of them into bankruptcy. This Panic of 1819 led to such a depression that western regions of the country still suffered in the late 1820s.
By Jackson's administration, the Bank had expanded into twenty-nine branches and was doing roughly seventy million dollars of business a year, handling twenty percent of the nation's loans and monetary notes and one-third of all deposits. Perhaps more important, Jackson–who because of his previous election experiences remained wary of voting improprieties–thought that a bank with that much power could not remain independent of the electoral process. While the Bank in 1830 remained relatively clean and did not abuse its power, Jackson believed it was a disaster waiting to happen, and set out to shut it down.
When the Bank, led by Nicholas Biddle, realized Jackson's intentions, it began a public campaign to curry favor. Biddle announced that the Bank intended to pay off the national debt–another of Jackson's pet causes–by January 8, 1833, the eighteenth anniversary of the Battle of New Orleans, in Jackson's honor. The offer, of course, came with the caveat that the Bank would get a charter extension. Biddle also began to offer financial favors to Jackson's friends, in the meantime proving Jackson's belief that the Bank could play political games if necessary. Jackson did nothing and waited for the right moment to act. Biddle then surprised everyone by asking for a recharter in January of 1832–a Presidential election year–four years before the current charter expired. Biddle believed that by making the Bank an election issue, he could force Jackson to support it out of fear that it might cost him the election if he did not. Jackson figured otherwise.
The recharter bill came to the Senate floor in March, and it met with surprising support. Senator Thomas Hart Benton, a Democrat from Missouri who led Jackson's congressional opposition, scrambled to counter the support. Benton convened a House investigation that restated many of Jackson's complaints and publicized them in newspapers across the country. The effort was too little, however, and the recharter measure passed Congress by early July. When the bill arrived for Jackson's approval, he told Martin Van Buren, "The bankis trying to kill me, but I will kill it!" Jackson and his advisors carefully crafted a veto that would not anger the public and therefore would not cost the Democrats support in the fall election. Citing the stockholding of foreign citizens and the Constitutional questions the Bank's monopoly raised, Jackson ended with a stunning broadside to the Bank, arguing that its favoritism went against the role of a government that should stand for honesty, equality, and fairness. When Congress could not overturn the veto, the battle turned to the November polls.
The 1834 election developed into a battle between Henry Clay and John Sergeant of the National Republican party, Jackson and Van Buren in the Democratic party and–in the first third-party bid in American history–William Wirt and Amos Ellmaker from the Anti-Mason party. Clay latched onto the Bank issue, as it was one of the only weak spots in Jackson's presidency. The Democrats, meanwhile, shaped the campaign as one between the rich aristocratic Clay and the "everyman" worker Jackson. Jackson won handily in the Electoral College, defeating Clay 219 votes to 49. However, in the popular vote, Jackson's two opponents garnered 530,189 votes while Jackson won 687,502–hardly a strong mandate from the people. In fact, Jackson stands as the only president in history to be reelected by a smaller percentage of the vote than he won in the first election. The Bank issue had indeed cost Jackson dearly.
The Nullification Crisis with South Carolina and the tariff issue distracted Jackson as he transitioned to his second term, but by the spring of 1833, he again focused on destroying the Bank. He announced that he would withdraw the government's money from the Bank, much to Biddle and Clay's dismay. Jackson, however, faced worries from the Treasury Department that the state banks afforded the same security as the national Bank. Nevertheless, on September 25, 1833, the Treasury ordered all government deposits would be placed in state banks as of the beginning of October. Biddle countered that the Bank would cease offering loans nationwide, which sent the nation into a near-panic, as state banks were unable to meet the new demand–even with the government's new funds–and many curtailed their loans. Jackson became only more dogged in his quest to stop the "monster" bank.
In 1834, Jackson began a push to move towards "hard" currency, gradually phasing out small bills over more than twenty years. He and Benton believed that only gold and silver provided proper security, as, during financial bust periods, working-class people could not get credit. Hard money, then, ensured the workers would always be paid in money that had real value. The move terrified many rich Democrats, who saw a future in which they might not be able to conduct business with large bills. In a final attempt to end the Bank, Jackson ordered it to cease issuing pensions to Revolutionary War veterans and to relinquish those funds. Biddle refused, and the bank battle quickly deteriorated. Jackson's own Attorney General questioned the moves, and Jackson faced barrages from business leaders up and down the East Coast who thought he must mean to ruin the country.
Some Democrats began to leave the party. Joining with National Republican, states righters, nullifiers, and other Jackson enemies, they formed the Whig party–headed by none other than Clay. The views of those involved were so disparate that they could only unify under the banner of opposing Jackson's bold new uses of Presidential authority. Indeed, the Whig newspapers soon mockingly anointed Jackson "King Andrew I." The new party, coupled with a rumor that a new bank might launch in New York to counter the national bank, brought the nation new fear of financial disaster.
Although Van Buren eventually quieted the new bank rumors, the country still hung in the balance when the Senate voted to officially censure Jackson for his actions in February 1834. Adding insult to injury, the Senate also refused to confirm Jackson's new Treasury Secretary. Jackson filed a protest with the Senate, saying the Bank's abuses of power made it an "imperative duty" for him as chief executive to rid the country of the Bank. He carefully ended with an appeal to the people, explaining anew his reasons for opposing government monopolies and saying that he was proud of his actions.
Above everything, Jackson prevailed. By April 1834, the Bank was dead. The Democrats in Congress rallied behind their leader and passed resolution after resolution supporting Jackson. The financial panic passed quickly. In the 1834 elections, Democratic candidates won handily across the country and gained the majority in the Senate–which, under the new leadership, quickly expunged Jackson's censure and apologized.

Mon, 04/11/2011 - 12:27 | 1158053 Highrev
Highrev's picture

Haircuts for everyone!


Mon, 04/11/2011 - 12:36 | 1158058 Timmay
Timmay's picture

The Market is not the economy, everyone here knows that. How many people own stocks in this country?

A Market correction on dollar strength my hurt the "little" investors, but we all know how the Wall Street Banks will play this, "Hey, Ben, thanks for the heads up".

Obama will use the correction to force his vision of what needs to be done i.e. Raise Taxes. He cannot raise taxes in a high inflationary environment, but in a dollar rally, commodities come down, food and gas are cheaper thus providing a boost to the economy. Avg americans will care less about "losses" of the investor crowd, Wall Street will ring up the profits since they knew in advance and shorted stock while going long the dollar.

I think the event happens very quickly, and crushes all speculative PM bets and Dollar shorts that didn't get the advance warning to get out of the way.

Obama holds cards here since there is no strong Republican challenger and his based is pissed off at him. He NEEDS the market to crash and commodities to come down to sell his plan. His plan will be more sellable to voters since many, many pensions will be effected. Yes, the cost to service the debt will be more, but that fits into his plan as well,

"We need to cut spending and raise revenue and we cannot do it with low tax rates. I am willing to compromise with the GOP on spending cuts since they have made it such a high priority, but they must work with me on raising tax rates. We need to raise taxes on the Rich, we tried your plan [GOP] to hold the Bush tax cuts and look where we are now. Now it is time for MY plan." -Barry O.

The banks will be fine, if you haven't noticed, they always are these days.

Mon, 04/11/2011 - 12:28 | 1158060 Stares straight...
Stares straight ahead's picture

They do not have two choices.  They only have one plan.

The fed will crash the dollar.

They have no choice, as to service the debt (if the dollar strengthens) will cause default.  They more or less own real estate and other assets now, deflation is very bad for the fed.

I think they will declare a global economic emergency, freeze all gold in the US including european gold, discard the tattered FRN, default on US debt, implement a gold referenced currency that will be doled out and controlled more or less, by the US under the guise of the IMF. They will justify this in the name of stability. 

What do you think?  I would like to know.

Mon, 04/11/2011 - 12:37 | 1158080 MarcusAurelius
MarcusAurelius's picture

Nice to see (as always) zero hedge hammer the real issue at stake here. A few years ago it was simply raise rates "crash the economy"; lower rates "crash the dollar". So very astute of zero hedge to state the oil and commodities in general now becoem the trump card. This one I have known for a while and have followed it as it has led to four previous crashes in the economy. A 100% track record over the past forty years. Would that be a good bet to take the odds on? Uhhhh...ya....I'll take those odds any day and with any entity. Even one that can print limitless supplies of money. When Joe Sixer reaches the end of his spending rope (and truth be known he was there before this commodity bull market began) it is game over. That 1K extra this summer that he was going to spend on a went to oil/gas, food increases and hydro just to name a few. Except it isn't over. He hasn't felt the full effect of food increases yet. He's about to. All at a time when he can ill afford this increase in cost, if for no other reason that he can't borrow either to tap his house or credit cards. Sadly he's maxed these out too. So what choice does he have if he can't borrow and he can't go into more debt? Well you can't spend rocks (yet?) so the economy which depends on him for 70% of its profits begins to wilt. It doesn't matter that the rich and the banks move their money around easily, it is essentiallly game over as although they may not realize it, their fate is tied to Joe and his spending habits too. Another factor that you might look at is this exportation of inflation to other countries (like China) to get them to raise the value of their currency making US exports more valuable in theory. Well Ben Shalom may get what he wishes although like this chess game the opponents moves are not necessarily predictable China likely plays a pretty fair game of chess too and once it does revalue its currency and raise interest rates higher then what? Will all this inflation come rushing back to Ben and his buddies? Well....if it does....checkmate for game two. Except it won't be him and his wealthy cronies that suffer. It will be check mate for Joe once again. 

Mon, 04/11/2011 - 12:37 | 1158085 arizona11912
arizona11912's picture


I think Congress with pass an appropriations bill such as if you owed 100k on your mortgage before the crisis then during the crisis inflation went up 200% by law you'd pay 300k. It's hard to imagine the primary dealers would allow all the "serfs" to have their debts wiped clean.

I heard the scenario I mentioned above happened in Argentina during their crisis in 2001. Can someone verify that?



Mon, 04/11/2011 - 12:45 | 1158111 Pez
Pez's picture

The Bernank Chinook. Payload capacity 500 Million USD in 100's. Can cover 120 Sq Miles per drop. Unfortunately all known drops only in Wall St. TBTF zone.





Mon, 04/11/2011 - 12:53 | 1158137 fallst
fallst's picture

It's called The Enron Loophole.

You can Thank Phil Gramm, UBS TeetSucker, extraordinaire.

This Putrid Filthy Pig Shoveled the Commodities Futures "Modernization Act" , paving the Way For Ken Lay (Kenney Boy) and his Merry Pranksters, with their Criminal California Rolling Blackouts, and the Economic  Destruction of Loyal Enron Employees and Shareholders.

Mon, 04/11/2011 - 12:56 | 1158153 trav7777
trav7777's picture

People are acting as if the Fed can actually CONTROL the aggregate ROI on the real economy.

It cannot.  The Fed is a LENDER.  It is subject to the same forces of supply and demand for its product - credit - as any other business is for the product it offers.

There is no demand for credit at high rates.  Attempting to charge a higher price than the market will bear means no sales.  That means no lending.

The people expecting to have their money just magically "make money" via compound interest don't seem to get this.  The banks can't lend at 7% to pay you 6% anymore.

Debt continues to compound inexorably.  And it cannot be repaid.  It is a sin to even try.  The usury clan considered using usury against their own clan as a sin; the very institution of the thing is bogus.

Everybody who's ever been in compound debt knows just how the interest and capitalization thereof just eats you up.  You seem to end up paying forever, and if you add up the total payments you see how the usurer has extracted the principal PLUS a pound of flesh right out of your backside.

There is simply no way the debts can be repaid...jacking up taxes so that people literally WORK all day in order to repay some banker who conjured capital?  This is how holocausts and forced exoduses happened in the past.

Outstanding consumer credit is $50T.  It is INARGUABLE that the banks who are the creditors to this NEVER had that amount of capital to lend.  They lent what they did not have.  Therefore they should not be "repaid," much less with interest.

Mon, 04/11/2011 - 14:47 | 1158507 Josh Randall
Josh Randall's picture

+++ $50 Tillion - nice

Mon, 04/11/2011 - 15:46 | 1158742 WaterWings
WaterWings's picture

Trav, are you talking to the wall again? To whom are you referring?

It cannot.  The Fed is a LENDER.  It is subject to the same forces of supply and demand for its product - credit - as any other business is for the product it offers.


There is no demand for credit at high rates.  Attempting to charge a higher price than the market will bear means no sales.  That means no lending.

You point out the obvious and still faceplant. You are incorrect that the Fed is just like any other business - who else can lend at 0% and stay solvent? The Fed is driving out all the good money - it is destroying the real economy because insolvent institutions, with accounting tricks that would normally be sending bankers to jail by the 1,000s, don't have to fail now. They can watch everyone else do it first and buy up the assets for pennies.

And when was it that modern banks paid 6%!!! to everyday investors?

Otherwise a good post for the typical ZH fare.

Mon, 04/11/2011 - 12:59 | 1158164 MarcusAurelius
MarcusAurelius's picture

I usually don't reply to much but that is an interesting scenario Arizona11912 and yes it has been done in the past. On a scale this large????? Hmmm... it would have to be world wide and include everyone. Even here in Canada where things are supposedly ok do you think people might have a problem with everyone else in the world being forgiven for 2/3 of their mortgage while we get stuck with 3-400K mortgages? If it happend, I would quit paying my small mortgage immediatly and ralley a protest group here at home of which the likes had never been seen before. Except I am a pretty easy going guy so likely someone would beat me to the punch in Quebec or out West where they are far more vocal and liberal about these things. You might even see people die here in Canada if that happened like a third world country. Losses to the banks would have to be compensated somehow and who would eat these trillions in losses? A better bet would be simply to reset the whole dam thing but very unlikely as the wealthy that control this system of slavery would not allow it. They would take an enormous bath and then they would be like us? It is the same argument I propose for hyperinflation. It won't happen because of this factor alone. Hyper inflation will wipe them out too so you would have deflation long before hyperinflation. It is a great idea but no one would go for it. If nothing else who would administer it and you'd have to have politicians all on the same page. These guys can't even come to terms with keeping the government open. What is the odds they could problem solve this issue? With the money they have already spend on bail outs Joe could have already been mortgage free. Obviously they don't care about this. However I am not into predicting the future and with the insane programs they have put into play already who knows???  

Mon, 04/11/2011 - 13:02 | 1158179 MarcusAurelius
MarcusAurelius's picture

Fantastic post trav7777 and so very true.

Mon, 04/11/2011 - 13:14 | 1158230 hampsterwheel
hampsterwheel's picture

It is only a lose - lose when you believe the goal is a strong American economy. Check your premise...  This guy's work lays it all out - watch it only if you are interested in the red pill ; otherwise take the blue pill and think the Fed wants a strong American economy at this point in time...

Mon, 04/11/2011 - 13:56 | 1158360 carbonmutant
carbonmutant's picture

The farther the $Dollar falls the more the Chinese are gonna bitch...

At some point the parasitic Yuan will have to find another host.

Mon, 04/11/2011 - 14:23 | 1158441 ivars
ivars's picture

Japan may rise nuke accident severity level to higest 7 from 5!

Took them some time to count the radioactive releases.

Mon, 04/11/2011 - 14:51 | 1158513 DFCtomm
DFCtomm's picture

Interesting article, but isn't the stated policy of the administration an increase in energy prices, and isn't FED policy a lower dollar? They may very well panic and change their strategy, but at the moment it looks like everything is going according to plan.

Mon, 04/11/2011 - 14:59 | 1158537 Stares straight...
Stares straight ahead's picture


Mon, 04/11/2011 - 15:05 | 1158558 falak pema
falak pema's picture

The mystery in today's economy is the USD-Yuan connection. It hides the reality of their relative mutual fragility and intricate monetary tie-up. If the world currency war currently underway leads to a USD junk, it will leave the Yuan bare and made fragile by the unknown shadow banking cloud overhanging China's economy. Relative to a structurally weak Euro and over extended Yen, what will the Yuan do to regain respectability, pre-eminence, when moving from the USD peg? Big unknown...that will condition the POST USD monetary system.

Mon, 04/11/2011 - 15:38 | 1158704 AldoHux_IV
AldoHux_IV's picture

Regardless of Bernanke's decision, the end is near for the financial elites and central banking.

Mon, 04/11/2011 - 17:58 | 1159280 mikemcsaudi
mikemcsaudi's picture

Here is my question and concern.  Eventually there is going to be a "reset".  What geniuses are going to do the reset?  The "experts" that put us there in the first place?  Some "incredible" economist from Princeton?  Most likely.  Clowns followed by more clowns!  Like Martin Armstrong says, history will always repeat itself. 

Mon, 04/11/2011 - 22:42 | 1160207 MrSteve
MrSteve's picture

What  do reckon the price of beans will be?

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luckly123's picture

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Mon, 04/11/2011 - 23:03 | 1160314 PulauHantu29
PulauHantu29's picture

I suspect the Fed will be told to keep the Mega_billion dollar Bank Bonuses coming....gradually devaluing the dollar and destroying savers.....destroying anyone not invested in oil and PMs.

BTW, the dollar/oil relationship is also heavily influenced by MENA riots...not onlyh a weak dollar. And the MENA situation and the hundreds of thousands of "culturally diverse" refugees flooding into Europe will have quite an influence imho.

Fri, 05/20/2011 - 01:48 | 1294716 rmt001
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