Guest Post: Here's The Setup For The Con Of The Decade

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Here's the Setup for the Con of the Decade

The Con of the Decade, which I described last July, is being set up nicely.

I described The Con of the Decade last July (2010). The Con makes me a heretic in the cult religion of Hyperinflation.
I consider myself an agnostic about the destruction of the U.S. dollar and hyperinflation (basically the same thing), but my idea that hyperinflation is fundamantally a political process makes me a heretic. I skimmed a few of the dozens of comments posted on Rick's Picks and Zero Hedge after they posted one of my expositions on this dynamic, and didn't see even one comment in favor of this perspective.

The Con is being set up right now, and the outlines are clearly visible. The Con works like this:

1. The Financial Elites/Oligarchy raked in billions in private profit from the orgy of leverage, credit expansion, fraud, embezzlement and misrepresentation of risk that resulted in the Housing Bubble.

2. The losses were transferred to the public (Federal government, i.e. The central State) or its proxy, the Federal Reserve (i.e. the central bank), via bailouts, backstops, guarantees, the Fed's purchase of taxic assets, and an open window for the financiers to borrow billions at zero interest (ZIRP) for further speculations.

3. The Treasury now borrows $1.6 trillion every year, fully 11% of the nation's GDP, as the Central State has replaced private demand and credit expansion with its own borrowing and spending.

4. Non-U.S. central banks have largely ceased to support this unprecedented scale of borrowing, so the Federal Reserve now buys most of the Treasury's issuance of debt via QE2 (quantitative easing, the direct purchase of $600 billion in Treasury bonds).

5. Unlike Japan, the U.S. cannot self-fund its own government borrowing: while U.S. investors, banks and insurance companies do own a significant chunk of Treasuries, the U.S. savings rate (capital accumulation) is still abysmally low, around 4%, which is half the historical average savings rate.

This is the result of the Keynesian Cult's One Big Idea, which is to pull demand forward and encourage borrowing and spending now by any means necessary, and thus sacrifice capital formation/saving.

So the basic outline of the Con is that private losses from the financialization of the U.S. economy were shifted to the public. Now to keep the Status Quo and Financial Plutocracy from imploding, the public is on the hook for $1.6 trillion in additional borrowing every year until Doomsday (around 2021 or so).

Having secured the backing of the Central Bank and Central State, the Plutocracy's only problem now is that it needs a risk-free source of high-yield income. Yes, it has a trillion dollars or so sitting in bank reserves, collecting interest from the Federal Reserve; this is certainly risk-free, but the Fed's Zero Interest Rate Policy (ZIRP) keeps the rate of return absurdly low.

Here's where we see the Con taking shape. The ideal setup for risk-free returns is to own Treasurys that pay a high yield. The way to get higher interest rates is to first make the Treasury market supremely dependent on a central bank or single buyer: Done. That buyer is the Federal Reserve.

Next, have that buyer stop buying. Suddenly, interest rates start moving up. If you don't believe this is possible, or part of a larger project, then please explain why PIMCO sold all its Treasuries. Duh--because interest rates are set to rise, and not by a little bit or for a brief span, but by a lot and for years.

That means holders of long-term Treasuries (and other debt) will be cremated as rates rise. (Holders of TIPS will do OK, unless the government fraudulently sets the rate of inflation well below reality. Hmm, isn't that exactly what's it's already doing?)

Once long-term rates have leaped up, then start accumulating the high-yield bonds. Why would rates jump? Supply and demand: as the demand for low-yield Treasuries dries up, the supply keeps rising: every month, the Treasury has to auction tens of billions of dollars of bonds, or even hundreds of billions of dollars. There is no Plan B, the bonds must be sold, and if there are no buyers, then the yield has to rise.

Once rates have been engineered much higher, the Financial Oligarchy accumulates the high yielding bonds.

Here's where "austerity" comes in. Once rates are so high that they're choking the real economy, then voices arise demanding the Federal government stop borrowing and spending so much. Austerity (forced or otherwise) soon reduces the supply of bonds hitting the market and so rates decline, boosting the value of the high-yield debt.

To service the cost of all this Federal borrowing, taxes are raised on what's left of the productive members of society.

To add insult to injury, it will become "patriotic" to "buy bonds."

OK, let's check the setup:

1. Treasury market now dependent on one buyer: check.

2. That buyer stops buying, pushing rates higher: no QE3. Check.

3. "Austerity" is now seen as inevitable--but not just yet: check.

What the true believers of hyperinflation and the destruction of the dollar cannot accept is that debt is an asset to the owner of that debt. In focusing solely on the advantages of inflation to borrowers, they ignore the critical fact that inflation quickly destroys the value of the asset that debt represents to the owner. And debt is a primary asset to pension funds, insurance companies, banks, and indeed the entire financial sector.

So in claiming high inflation is guaranteed, adherents are claiming that the entire financial sector will accept being wiped out, just so Mr. and Mrs. Taxpayer won't have to pay interest on the ballooning government debt.

That's exactly backward: the entire point is for Mr. and Mrs. Taxpayer to pay high yields on Treasury debt, owned by the Financial sector's Oligarchs. The Con is to stripmine the public coffers, then impose higher rates and "austerity", buy the debt with the cash plundered from the public, and then sit back and enjoy risk-free returns as taxes are raised on the remaining tax donkeys. Inexpensive Bread and Circuses (SNAP food stamps and the political theater of the two parties staging a partisan "fight to the death") will keep the peasantry entertained and complicit.

As I concluded in the first foray into the Con:

In essence, the financial Elites would own the revenue stream of the Federal government and its taxpayers. Neat con, and the marks will never understand how "saving our financial system" led to their servitude to the very interests they bailed out.

The circle is now complete: in "saving our financial system," the public borrowed trillions and transferred the money to private Power Elites, who then buy the public debt with the money swindled out of the taxpayer. Then the taxpayers transfer more wealth every year to the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will own the debt that was taken on to bail them out of bad private bets: this is the culmination of privatized gains, socialized risk.

In effect, it's a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers. No despot could do better.

This is the ultimate endgame of the financialization of the U.S. economy and the concentration of wealth and thus political power in the hands of those who skimmed the immense gains from that financialization.

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Quinvarius's picture

The best laid plans of mice and men...

Oracle of Kypseli's picture

Look out for an interest rate hike this weekend, if not today. Gold and silver breakout will not go unchecked.

the not so mighty maximiza's picture

If they raise rates the goverment is even more screwed because just the interest on debt will be at insane levels. 

WaterWings's picture

OTM: "Here's how they'll bake the cake..."

tnsmm: "I think you forgot to put in the flour."


Charles, you have an otherwise very intriguing idea.

66Sexy's picture

i like the idea of accumulating dollars and buying up collapsed commodities once rates hit peaks... thats what all PM investors must be prepared for; the dollar is the PM hedge.

A fiat-float until an eventual doubling of net worth.


mayhem_korner's picture

the dollar is the PM hedge.

Go back into the closet, count to ten, come out and try again.  'tard.

ElvisDog's picture

I wouldn't be too hard on 66sexy. TPTB may very well try to crash commodities, and they may succeed for a little while. If they do try, I suspect the success of the intervention will be less than they hoped for and of less duration too.

SRV - ES339's picture

GS tried Monday... worked 'til Tuesday (but the bond auction results were great... the true goal).

rocker's picture

Lloyd Blankfein and his band of thieves, (Neel Kashkari and Paulson), must be put in Jail.  He lied to congress. Put him in jail.

Close them down. Take away bank status. Take away their software to manipulate markets.

Americans would at least have a chance.  Until then.  They control all.  The FED, the Treasury, the commodity exchange, forex and whatever President is in office.     Until then We Are Japan.   

forexskin's picture

What the true believers of hyperinflation and the destruction of the dollar cannot accept is that debt is an asset to the owner of that debt

debt asset holders, meet the bloodless stone.

rocker's picture

+10   The Morque and Shitty Bank own alot of it.  Problem is, when you rob so much money from the debtors. You get defaults.

zyphryx's picture

Hear! Hear! What good is debt if you can't collect?

tmosley's picture

I wouldn't be so harsh.  If the folks in charge had any competence, they might well do what the author thinks they will do.  Higher interest rates would save the economy, if the politicos had the will to default.

Gold and silver will NOT do poorly in such a scenario.  Indeed, with Treasuries no a longer safe haven asset, gold will likely explode as it resumes its role as such.  

The thing is, big evil insiders will profit from ANY situation, if they understand it.  I'm not so sure that they do.  If they did, they would have huge stacks of gold and silver coin in their safes.  There is no need for the author's scenario to play out for insiders to profit, either in real terms, if they understand what is happening, or in nominal, paper terms, if they don't.

The point is that the ship of state has hit an iceberg.  The normal manner of disembarking is to get into the small boats that double as life boats, so you aren't going to be left behind if you go ahead and grab some seats.  If the ship should somehow limp into port, fine, you would need your gold anyways so you can move into the next currency system without a penalty.  If it doesn't make it, then you survive while everyone else drowns.

Bob Sponge's picture

Charles Hugh Smith needs to explain how the 2021 Dooms Day he predicts will effect the rich elite executing the con he lays out. The Dooms Day would either be hyperinflation due to creating dollars to fund the gov't or austerity so severe that the US is in severe disarray. In either Dooms Day scenario, I would not want to be holding treasuries.

tmosley's picture

Right, but you might want to buy them after the rates explode as a result of doomsday, assuming no dollar inflation (due to magic of some sort or another).

Seems pretty wild to me, but not impossible.

Amish Hacker's picture

Not impossible, but the whole plan seems to hinge on buying at the exact top in interest rates. If TPTB purchase early, before interest rates have finished going up, they'll take losses, too. It's not enough just to wait for rates to go up, you have to wait until they have stopped going up.

Weaseldog's picture

When you own the cow, the milk, the churn, and laborers, the butter is all yours.

rjabele's picture

whose the 'tard

in the expression  $/t-oz  the dollar is the numerator and the troy oz is the denominator - by definition they are always and everywhere in an inverse relationship. When one goes up the other goes down.

how can that not be a hedge?

The USD is the absolute PM hedge.





mayhem_korner's picture

You've just enlightened us that rjabele translates "simple one" in your native tongue.  Your "absolute hedge" works great so long as there is only $ and oz in the world.  Kinda like when we pretend in econ 101 that only guns and butter can be produced. 

So help us understand how you capture the arb today given that the $ and silver both rose, but the $ fell in terms of crude and silver rose against crude?  Check your answer against your theory.

SheepDog-One's picture

'Dollar is the PM hedge'...I dont even know what thats supposed to mean.

malikai's picture

It's like Celente says: 80% PM/20% currency, or so. I think he likes his currency split USD/CAD. It makes sense for a hedge. I think I'd rather have puts on my physical PMs, though.

mayhem_korner's picture

Hedge against what?  Hold fiat to hedge against a drop in fiat-denominated asset?  Think it through and you'll realize what you're saying is hedge fiat with fiat (and claim victory if you time it right). 

You're mixing value store with fiat-denominated profit.  I'm with Sheepdog, it doesn't make any sense.

hedgeless_horseman's picture

Hedging and diversification guarantee mediocrity at best, which is fine if you are already old and/or rich.

SME MOFO's picture


diversification is for cowards but

me likes a nice hedge to clear away the correlation underbrush and so daddy can sleep at night when a position is so big his eyes bleed from the pressure

FEDbuster's picture

I hedge my precious metals, with alternative precious metals (brass and lead). 

With only 45% of Americans working (the other 55% too young, unemployed or retired) and only a portion of those working paying any taxes, I don't see income tax revenue being the savior for the deficit (or interest payment) problem.  The next big thing will be a VAT in the US.  They will skim a little off of each transaction (including Internet sales) at each level of transfer.  Those on fixed income or the government dole will continue to see their purchasing power go down as inflation and taxes eat up more of their income.  We currently pay almost 10% sales tax here in AZ, property taxes have remained constant despite a 50% drop in real estate values (taxes pegged at the peak in 2006).  The government's "needs" will continue to grow, as the citizen's "means" continue to drop. 

I still think WW3 or a manufactured pandemic (designed to inflict casulties on the 60+ population) will be their last ditch effort to "fix" things.  The author's 2021 doomsday date is optimistic, I think we will see something much sooner. 

Martin Armstrong (now a free man!) has written an interesting article titled "Nothing is Certain but Death, Taxes and the Other Side of Inflation" please take the time to read it.

History always repeats itself, in new and innovative ways.  Fiat money ALWAYS fails.

malikai's picture

Not neccessarily. If QE ends and PMs either get cut down or they come down as a result of extreme rates, puts serve two purposes. 1. They allow you to retain nominal value. 2. They allow you to BTFD even more. 3. They may also help some people sleep better at night.

Dry powder enables similar results, but without the cost/upside of buying puts.

mayhem_korner's picture

I agree with the puts.  I was making reference to the soft-skull comment earlier in the thread about hedging PM with dollars. 

So you can lower your scythe, Jethro...

malikai's picture

I'll lower my scythe when I'm done with the harvest. :)

redguard's picture

Huh, the dark lord of the scythians. I wonder if that's who Blankfien was referring, certainly wasn't Jesus.

IQ 145's picture

 "The dark lord of the scythians"---monty python puns. funny.

Bicycle Repairman's picture

Nominal rates will go up, but real rates remain negative as inflation goes up.  Commodities and PMs continue up.

Bananamerican's picture

yup, AND author seems to leave out/ignore one little thang...the Pain of the people. 

I doubt we'd get to where his scenario leads before things began to burn

Chuck Walla's picture

They elected Obama without a shred of evidence he could the job. I don't think this looks all that hard.

Pegasus Muse's picture

TPTB selected and backed Obama precisely because they knew he couldn't do the job.  That was the point.

Ned Zeppelin's picture

What makes you so sure Obama is not performing precisely as his TPTB backers were hopeful he would?

Chuck Walla's picture

Its not that Obama is not doing the job he was hired to do by TPTB, its that the people were so easily led to actually allow him to take the job. On the other hand, McCain, the Progressive Lite, I think was the backstop option if someone had actually been able to wise up the chumps. John would have made a much better Manchurian.

jomama's picture

i wouldn't say so much 'easily led', but more like desperate.  
throw in a dash of color and you've got the masses cow tied.

sgt_doom's picture

"What makes you so sure Obama is not performing precisely as his TPTB backers were hopeful he would?"

Exactly, Ned, exactly so.

How any fool today could possible not understand that anyone from the University of Chicago law or econ faculty would behave otherwise is beyond all credulity.

Did they expect Antonin Scalia, the last high-profile guy from U. of C. Law, to be a liberal, for god's sakes?

Catch a clue, non-thinking types out there!

Weaseldog's picture

He's doing exactly the job that the bankers elected him to do.

He's also performing his duties with great competence.


You just think he's screwing up, because you think he should be doing a completely different job, and working for completely different people.

geotrader's picture

What job?  Act like a puppet?  He's doing quite well.

DeadFinks's picture

All it takes to make his mouth move is two teleprompters.

GeorgeHayduke's picture

Not to defend Obama and those that voted for him, but the other, more conservative crowd, elected Bush the lesser...twice...knowing he was a worthless failure and only good as a country-clubbing frat boy. But hey, he talked tough and that counts for something with the Jingo crowd.

Face it, the Prez's job is to carry out the wishes of the upper 3-5% (maybe just 1%). End of story. All the rest is fluff to appease the peasants and keep them from rioting.


Weaseldog's picture

Remember, half of the American people are communist traitors that want to eat your children.


Now turn left and cough while the bankers steal your wallet.

SME MOFO's picture

+ 57,700 scrubbed felons

FIAT_FixItAgainTony's picture

agreed chuck, and i prefer to be the gentleman who uses silver!

Cinfultreat's picture

Debt is a foolish mans riches

66Sexy's picture

one thing to be considered.


the government doesnt control interest rates; the fed does. the fed is a private, for profit institution.

rates could be raised on the notion of "saving" the purchasing power of the dollar.