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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paratrooper325's picture


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.

paratrooper325's picture


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.

Geoff-UK's picture

Please remove Charles Hugh Smith's posting privileges.

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....

WaterWings's picture

Nobody wants to go home alone.

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..







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.


Catullus's picture

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

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...

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!

sbenard's picture

We're toast! Plan and prepare accordingly!

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.

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

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.

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.

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.

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

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.


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.

Highrev's picture

Haircuts for everyone!


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.

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.

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. 

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?



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.





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.

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.

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.

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???  

MarcusAurelius's picture

Fantastic post trav7777 and so very true.

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...

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.

ivars's picture

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

Took them some time to count the radioactive releases.

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.

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.

AldoHux_IV's picture

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

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. 

MrSteve's picture

What  do reckon the price of beans will be?

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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.

rmt001's picture

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