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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redpill's picture

So helicopter Ben is going to do a complete 180-degree turn, abandon the last 4 years of monetary policy, abandon his "inflation target" and suddenly embrace deflation warmly?  Sorry I just don't find it plausible.

jjreal's picture

Simply brilliant, heretics are either totally wrong or totally right :))

MK ultra's picture

It's all clear to me now. The U.S. will become a nation of economic slaves.

Damned glad I blew it out in the 80's and 90's. Will have something to tell the young ones about.

Oracle of Kypseli's picture

We already are. Unless the banksters go to prison there will be no salvation. 

Sudden Debt's picture

States sell prisons to banks to pay for their debt.
Bankers own the prisons.

So what good does it do to send them to their own prisons?

KinorSensase's picture

yep.  our entire political/social/legal system is just as fucked as the economic system.  Learn to swim.

Oh regional Indian's picture

Just a short litle change from will become to has become and you are on the money Sir.

The US (and actually the rest of the world with it, this is sheeple we're speaking of) are already debt slaves. Those that are not are being sucked into the vortex faster than you can say Credit Card.

Here in India, the debt enslavement machine is in full swing. People were kept quality product hungry for decades, while watching TV that showed opulent western lifestyle.

Then, starting in 1990 and accelerating in 5 year increments, everything was loosened up, import regulations and tarrifs, credit availability, foreign TV channels (big one, created the aspirationalist economy), shit service, call center jobs, fast forward to McD's delivery jobs, cheaper credit, no money down.... same track but at warp speed. in 10 years, they have 50% of a population for whom takign a loan was anathema to everyone wants it. Farmers got the short end, loans for seeds (terminator, GMO shit from cargill  and monsanto), loans for tractors they did not need and could not repay after one bad season....

classic, horrifying, heart-less....and unfolding at warp-speed even as I type.


Irwin Fletcher's picture

ORI, formerly in the US education system, I'm not sure about now, this process was called the 'transition to a service-based economy'. Teachers/professors looked at you real funny if you suggested that the acceleration of this process by inefficient government policies should be questioned. Similar story with GMO crops right now, but I thought India was one of the remaining hold out countries? Has something happened in the year or so since this article?

Oh regional Indian's picture

Irwin, the GMO story un-folded under th etable here so to speak. Pay someone a little sumtheeng and you can do whatever. Clinical trials is one such "growth" industry in India right now.

They started out with BT cotton, a major cash crop in many parts here. Ruined many a farmer (farmer suicides are off the charts). And monsanto sold their terminator seeds and round-up ready seeds. They made a big hue and cry about Brinjal (that would be eggplant in the US) but that was all for public consumption. Such an unregulated and unregulatable market here, they just did their stuff.

So yes, we are quite GMO'd, sad to say.


Irwin Fletcher's picture

Thanks ORI, even though that's not what I'd hoped to hear. Maybe it's inevitable. Democratic processes and activism are capable of creating well-intentioned laws, but perhaps there is just no mechanism for enforcing them and punishing offenders. Maybe as long as there is opportunity to profit, those charged with enforcement will either share in these profits or encounter a worse fate.

slewie the pi-rat's picture

hey fletch!  ORI has a site, which he advertiZes here about 100X/week, where he plays Great Mother to almost anyone.  lately, he doesn't seem to be able to keep the venues straight and has been talkin like a man with a paper asshole all over this site.

that said, i consider him a pretty damned good guy and a friend, to boot!

anonnn's picture

re: insanity

A debate on "How deliberate manipulation of inflation/deflation for personal gain is not insanity" would be interesting.

Likewise, with such topics as "How unfairness, privilege, fraud, omission of vital data, Corporations-are-persons and Royalty lines [Emperors-Kings-Queens] can be justified markers of insanity".

jjreal's picture

Well, the USofA has always been a nation of slaves, since it's founding... the rest of the world is not much different, maybe less extreme. Original slaves were "owned" and worked for "free" but the "owner" had to use his own income to give them shelter, food, clothing, healthcare, also to their families ... now the slaves are "free" but the "ex-owners" pay them miserably and don't have to worry about housing them, feeding them, clothing them or their families, less headaches - just saying, it's more or less the same in the end... bread and circus, please give us more !!!

As a very wise old physicist/economist says (you know who I am referring to): human nature changes very slowly, if at all.



hedgeless_horseman's picture

Buy low, sell high works for treasuries, too?  Nothing new here. 

That said, buying in late to a yield rally is easier said than done. It requires either a crystal ball or brass balls. 

X. Kurt OSis's picture

Yep.  One big transfer payment in the form of an IOU from the sheep to the banks with regular debt service through no real wage growth and a negative real interest rate. 

What's your point?  This has been going on for decades. 


W.M. Worry's picture

They have been rehearsing it for decades. Now they're taking the show on the road.....

Hedgetard55's picture

Con of the Century is in the White House right now.

X. Kurt OSis's picture

Nah.  The prez is just as much a sucker in this as everyone else.  He's the dummy in the room that stands up after the pitch and goes "This is a great deal!  Where do we send our check!"  You need an influential mark to get the rest of the sheep to capitulate. 

The marks thus far?  Clinton, Bush II, Obama.  The next one will be worse.  The next guy may well be physically red from all of the kool aid.


X. Kurt OSis's picture

Not that I care, but I'm curious as to what motivates people to junk posts.  The theme for ZH is anonymity.  Why not just post a reason or objection?  We are all hiding behind as least the perception of anonymity... to silently junk when you are already posting anonymously just doesn't make sense to me. 

I get it if you don't feel like writing a response, so lazy or lack of interest in fully responding to something would work for me as explanation.  Again, not that I really care, just curious.

Politics seems like an obvious topic for people to junk no matter what you say.  For what its worth, I don't really have a political view.  All politicians should jump off the same bridge, imo.

slewie the pi-rat's picture

lol!  pan-the ist + avatar = fabulous & wonderful, too!  must admit don't regognize the portrait but it could be a pol philos. or writer whom i admire, already.  i don't junk XKurt0 and have preferred to blog to him if i think 1 or 2 thoughts might apply.  plus, he's even cogent and has nailed more than one thingy on zH, at times.  perhaps.  personally, i value XK0 in that he's put a little Juice into the strings, from time to time.  i think.

pan-the-ist's picture

That's Spinoza.  Pantheism is his baby.

RockyRacoon's picture

... I'm curious as to what motivates people to junk posts.

I've concluded that it's jealousy.  Most folks being a product of the current educational system can't compose a proper sentence so they begrudge your ability to do so.  In the same sense, they are unable to assemble a cogent thought, so that, too, raises their impulse to strike back.   What this site needs is a thumbs-up button.   In conclusion, wear your junks with pride.

JW n FL's picture

*** "The next guy may well be physically red from all of the kool aid." ***


Get your KoolAide!! Your Banker Lobby Dollars!!! Getum while they are hawt off the press... wet ink dollars from the 0% Fed Window!!! Come on whos next? step up and get your cut of the Lobby Dollars!

Chuck Walla's picture

Truly, I think Obama is a narcissistic sucker who believed the hype he was told by Soros and his operatives. when they are all in a room, Obama is the only one who doesn't know who the chump is.

tarsubil's picture

This is one of the funnier posts on ZH the last couple days.

InconvenientCounterParty's picture

I compliment you on your ignorance of the past.

You will make a fine soldier.



samsara's picture

heh heh,   Just what I was thinking.

Vendetta's picture

"Single acts of tyranny may be ascribed to the accidental opinion of  a day.  But a series of oppressions, begun at a distinguished period, and pursued unalterably through every change of ministers, too plainly proves a deliberate systematic plan of reducing us to slavery." - Thomas Jefferson


Ever since Aug. 15, 1971

faustian bargain's picture

Damn that TJ was a smart man. I think he was probably the intellectual high point of the US political history. All downhill from him.

101 years and counting's picture

it took a decade to set up the con of the century.  they even killed 3,000 people on Sept 11, 2001 to get the ball rolling.

slaughterer's picture

Nice typo: "the Fed's purchase of taxic assets"  "Taxic"  We got the toxic with our taxes.

bingaling's picture

I thought the author was from Boston .

hack3434's picture if Atlas won't shrug. Those that have the means will just pack up and leave.

JW n FL's picture

Maybe if People got a clue? then "We the People" could take back our Country from the "Banker Lobby Dollar Whores"!


The fact that the Populace is spoon Fed shit from.. CNBC, MSNBC, NBC and the Corporately Owned Like!! Means that the Facts of how "We the People" are really fucked will Never, EVER! hit main stream..

and then...

Most, like the Union Workers! they dont give a fuck about how people are getting fucked.. they just want thier cushy jobs with pensions back..

The Country is FILLED! with Lazy Fucking People who dont care about aything except danzig wiff da starz and judge judy. The Majority here doesnt want change they want spoon fed!

As for leaving.. well! if the Majority wants to be blissfully ignorant about how they are being robbed blind! if the majority is ok with the Constitution being shit on.. what else is there to do?

Watch America turn into the largest 3rd World Police State with a socio-economic divide which no amount of good faith or hard work can ever span.

The damage being done will hit a point of no return, that is to say that the idiots who are owned (Government) by the Corporate Souless Quarterly Bonus Mind Set thru Lobby Dollars will undermine themselves and the Country to the point of there being no way to get back.

You can Not un-pickle a cucumber!

It is a sad thing to watch.

and to be clear the majority of broke fucking idiots who dont have a clue or the ability to comprehend will be the ones voting in the next round of scumbags to power, Not You or me! we dont have the votes to effect change!

Pump up the flouride in the water supply! keep believing the tax breaks will effect you one day.. dream the dream! any help offered to our fellow Country men / women is Commie behavior! let them fucker starve and suffer!

Someone? Please grab the Flag and turn the lights out on your way out!

zaknick's picture

Ha! Them leave this juicy meal ticket? Atlas Shrugged....what a sick joke. Bankster propaganda!

For the antidote to Ayn Rand see Murray Rothbard (for you brainwashed enough not to see right through her).

SRV - ES339's picture

Actually a great read, and a noble philosophy... seriously, as much as I disagree with it. Of course it breaks down completely in real life (John Galt exists only in Ayn's imagination)... we get Lloyd, Jamie, Ben, Tiny Tim... and even more fraud and corruption than government could even imagine, let alone execute.

faustian bargain's picture

This juicy meal ticket is just about sucked bone dry.

If AS were bankster propaganda, the heroes would have been bankers. The one thing Rand seems to have seriously underestimated is the absoluteness of the corrupting influence of fiat currency. Beyond that, though, she pretty much nailed the whole fascist downward spiral, when government and private industry start making backroom deals.

Quintus's picture

This will work spectacularly until they try and extract $100 of interest payments for every $90 of wealth the economy generates.  Actually, things will tip over well before that, but you get the point.

As Greece amply demonstrates, you cannot choke the real economy with additional interest payments beyond a certain point.  Then everyone gives up, realising that the task is impossible and the interest just goes unpaid.  Your 'Elites' will be left holding a bunch of defaulted paper secured against an economy that is unable to honour it.


Black Economy Bitchez!

Oracle of Kypseli's picture

The Greek politician bastards are about to cut disability payments, instead of giving haircuts to the French banksters.

Geoff-UK's picture

Because disability payment recipients can't bribe politicians with as much money as French banksters. 

Whats that smell's picture

No, they will make you and I pay. Remember the "Elites" call the shots.

Quintus's picture

No, they really don't when it comes right down to it.  Let's see how the ECB gets on 'Making the Greeks pay' shall we?

RichyRoo's picture

Greek bonds are used as colateral for leveraged ECB loans, and central banks dont care about haircuts, theyll just adjust the colateral terms to cover the banks for the haircut.