Guest Post: Preserve and Protect: The Jaws Of Death

Tyler Durden's picture

Submitted by Gordon T. Long of Tipping Points

Preserve and Protect: The Jaws Of Death

The United States is facing both a structural and demand problem - it is not the cyclical recessionary business cycle or the fallout of a credit supply crisis which the Washington spin would have you believe.

It is my opinion that the Washington political machine is being forced to take this position, because it simply does not know what to do about the real dilemma associated with the implications of the massive structural debt and deficits facing the US.  This is a politically dangerous predicament because the reality is we are on the cusp of an imminent and significant collapse in the standard of living for most Americans.

The politicos’ proven tool of stimulus spending, which has been the silver bullet solution for decades to everything that has even hinted of being a problem, is clearly no longer working. Monetary and Fiscal policy are presently no match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD drop in Shadow Banking Liabilities has become an insurmountable problem for the Federal Reserve without a further and dramatic increase in Quantitative Easing. The fallout from this action will be an intractable problem which we will face for the next five to eight years, resulting in the 'Jaws of Death' for the American public.

The ‘Jaws of Death’ is the crushing squeeze of a shrinking gap between incomes and a rising burden of the real cost of debt burdens. Many may say there is nothing new in this, but I would respectfully disagree. There is a widespread misperception of what is actually evolving that stops voters from forcing politicians to address America’s substantial underlying dilemma.  It also stops investors from positioning themselves correctly.

Any solutions of real substance are presently considered political suicide. It is wiser to wait for a crisis event to unfold. As White House Chief of Staff and a primary Obama political strategist, Rahm Emanuel has said on numerous occasions: “You never want a serious crisis to go to waste”. It doesn’t take much intelligence to understand this also implies looking for a crisis as a political shield, for example from an almost insurmountable political problem such as a generational reduction in the US standard of living.

Before I delve into misperceptions of the ‘Jaws of Death’ and a reduced US standard of living, we need to briefly consider for a moment whether this is a planned outcome or just happenstance? President Franklin Roosevelt said:

“Nothing in politics happens by chance”.

Being in business I have always been very watchful of a slightly different variation of the same theme:

“Strategy is something that happens to you while you are looking the other way”.

Maybe Mark Twain said it better than both of us:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure and just ain’t so!”

My point is that there is a strong possibility that the ‘Jaws of Death’ is an orchestrated plan to reposition America’s standard of living. A plan not for the good of Americans but for the good of the banks and those that control the $630 Trillion unregulated, off shore, off balance sheet, OTC derivative market. It is no secret that America’s standard of living is no longer viable, as evidenced by a continuous and chronic deterioration in the US Balance of Payments, Trade Deficit and Current Account funding. It must be addressed and this may already be happening in a stealth fashion.

What the above suggests is that we need to address what is perceived as ‘truisms’ but in fact are not;  what is perceived as reality versus what is perception. These subtleties are the veils that hide the real dangers from us.


1- Housing

Consider President George W. Bush’s ‘ownership society’ where it was heralded, along with the previous Clinton administration, that every American should own his/her own home. It is fair to say that our society bought into this ‘hook, line and sinker’.  I used to hear the following statements endlessly, and disputing any of them fell on deaf ears with blank stares, as though you were an idiot to even challenge them.





“Housing and Real Estate are the best investments you can make

Residential Real Estate became the public’s ‘savings’ strategy
(in most cases their sole savings strategy).



My house is my retirement nest egg. I will sell it and move into
something less expensive when the time comes

Residential Real Estate became the Public’s  Retirement Strategy and
source of financial security.



We have made a lot of money on the appreciation of our house

The Emotional Wealth Effect justified increased spending on
vacations, hobbies and luxury items (through increased debt).



Money is so cheap my financial advisor suggested I should take
out  a Home Equity Loan as a wealth ‘extraction’ strategy

Perceived low rates justified spending and increasing debt. Home
Equity Lines of Credit & Loans (HELOCS) exploded.



“They aren’t making any more land!”

A sense of urgency was created that if you didn’t quickly take on
horrendous levels of debt you would never be able to afford your
piece of the American dream.



I can’t remember how long it has been since I have heard any of these statements.  How quickly accepted fact is found to be mistaken. Without this false mantra being sold to the public we would never have had a CDO driven financial crisis. Consider for a moment who is responsible for orchestrating this false belief system that the financial collapse was built on? Our government's misguided public policy certainly holds some responsibility for this.

“The public and majority of investors are always wrong.”

What we now face is the reality that jobs have disappeared and housing has fallen in an almost mirror image of unemployment as shown by housing starts below.

According to a recent 3,400 households’ survey by Fannie Mae, a more realistic attitude towards homeownership has emerged as the American dream of owning a home has lost its allure. Only 67% felt housing was any longer a safe investment and 33% said they were likely to rent in the future. The Wall Street Journal recently cited an interesting illustrative example of shifting psychology in which a 26 year graduate student walked away from his down payment to purchase a condo because he felt homeownership was an “economic trap” and “being  mobile and adaptable to the job market was far more important than homeownership”.

The National Association of Realtors is starting to show signs of panic because this shifting psychology is moving legislators to reconsider federal subsidies for homeownership. It has reacted by launching a campaign on the “value of homeownership”. I wonder if the National Association will get the same look I did when I questioned the housing statements listed above.  Oh how quickly things change!

2- Inflation / Deflation

I am continuously troubled by the inflation – deflation debate. One of a number of issues in these debates that concerns me is no one ever defines ‘time’ in their analysis and predictions. Without time specified we could have inflation, then deflation, (or visa-versa) for exactly the reasons that both opposing views meticulously articulate. Maybe even more blatant is that seldom do analysts consider the possibility that we could have both. This is the school that I am a believer in.

I predict that over the next few years we will have inflation in the things we NEED and USE. These are the items we buy and consume every week, the items we buy and not finance, and the items we need ready and recurring cash for. Food, energy, consumables, and basic services are examples.

We will have deflation in the things we WANT and OWN. These are the items we strive for that we perceive will move our lives to an even higher standard of living. They are primarily assets like: housing, real estate, financial instruments, boats, exotic cars, art, collectibles, etc. - often the items we finance.

It may be as simple as Maslow's Hierarchy of Needs; until our survival needs are met we won’t move towards the ultimate state of self actualization. We won’t think of luxury goods when we are hungry, cold and tired. But what is pushing us towards the ‘survival’ end of Maslow’s spectrum? If we live on debt and it becomes harder to secure or service, then this will accomplish that shift, despite new debt being cheaper than it previously was.

Money supply which is a driver of monetary inflation and deflation is now negative, as shown by the broader M3 money supply (which is no longer reported by the government). This illustrates that despite massive monetary intervention, forced deleveraging of mal-investments has come home to roost.

3- Credit Availability versus Credit Demand & Debt Servicing

Thirdly, only a few years ago interest rates were considered low and widespread refinancing was occurring. Home equity loans were all the rage to buy new boats, campers, vacation homes and every other imaginable toy that cheap money was felt to afford. Advertising was replete every evening with 0/0/0 financing offers: Zero down payment, zero payments for 48/60 months and zero interest. Who could refrain from taking advantage of these incredible offers?

Well guess what? Interest rates are now significantly lower and the products you bought previously are in most instances now even cheaper; yet few are clamoring for them.  At the marina where my boat is moored, you can’t give away a boat; where only a few years ago no one could get a mooring or slip for their newly purchased boat.  What has changed is we can generally no longer service our debt loads at even present historic 50 year low interest rate levels. Heaven forbid rates should go up!

The central issue may be not about whether rates go up, but rather if the above outlined housing weakness, concurrent inflation/deflation and weak credit demand persist for a protracted period.

I would like to show you exactly what this means if these trends persist, by using a fictional family as a way of illustrating what is now in store for the public.


The Smith family bought into all this mantra by purchasing a home. All their peers were doing it. Their family kept asking them why they hadn’t bought a home; and if they didn’t, they would surely never be able to afford one. They felt pressured to take on the debt obligations. Unlike many, they were relatively conservative and bought a home with a small down payment, securing a $200,000 mortgage at 6.5% fixed for 5 years. The mortgage was possible because they absorbed Private Mortgage Insurance (PMI) payments into their monthly budget. The family income was $50,000 annually. These are all nominal prices. To adjust for real values, we need to subtract the inflation rate from the mortgage rate. Inflation helps the Smith’s get ahead over the leveraged housing asset. The higher the inflation rate above 6.5% the more they win. The drawback is that their $50,000 income diminishes in real value. The salary therefore needs to be adjusted for real terms by subtracting the inflation rate from the $50,000.  Here are the theoretical results for various Deflation, Inflation and Hyper-Inflation scenarios.


As bad as the above theoretical charts look, it is actually worse in reality.  Why? Because as the pressures mount on unemployment, underemployment and competition for jobs, money becomes tougher and harder to earn. As disinflationary pressures shift to deflationary pressures, housing prices fall faster than the overall inflation/deflation rate. As a matter of fact they fall substantially faster. The following table represents the same numbers for the Smith family, but I have adjusted for the variance in house prices falling faster than the overall deflation rate. This is where it gets really scary.

What the charts tell us is that if present Monetary and Fiscal Policy is anything other than totally successful in arresting deflation and creating balanced inflation in both what we USE and OWN, we are in serious troubles. Any imbalances will be a disaster as shown on our charts. A failure to stop deflation will be devastating to those who are in highly leveraged assets.

If after reading the former example of the Smith Family you discarded it because you strongly believe elevated inflation is around the corner and you are a highly leveraged home owner, let me take you through a brief quiz published by The Daily Bell  to further test your understanding of reality: “The Great Housing Bamboozle: A Look Behind The Numbers Shows Home Ownership To Be A Horrible Investment”.


As I mentioned previously, attitudes towards housing as an investment have changed. There has been enough written on the housing decline but surprisingly little on how much further it is likely to go or whether it should be considered an investment at all.

Even after massive assistance in the form of HAMP, over $1T of government purchases of Government Agency debt, 50 year low interest rates and Quantitative Easing, the Federal Reserve’s monetary policy and the US fiscal policy has been unsuccessful in reversing the housing decline. New Sales, Housing Starts and Building Permits continue to deteriorate as housing inventories once again resume their climb with untold amounts of ‘shadow’ inventory still being held back from foreclosure by the banks.

Karl Case, the co-founder of the S&P/Case-Shiller home-price index, believes “a common mistake of the housing bubble years was the desire to own something that goes up in value rather than to own something you can afford”. He feels “more Americans need to view homes as durable goods, such as cars, and not primarily as investments”.

Housing is not coming back soon and I suspect we are still in the middle stages of a longer term housing correction. Historically, major financial distortions always return to at least retest their long term trend support. By various comparisons we still have a fair ways to go over the next two years.


A recent convention in Palm Beach Florida attracted over 50,000 people, estimated to be holding 25,000 problem mortgages. This is after the government placed Fannie and Freddie in conservatorship and bought over $1T in agency mortgages to keep the US mortgage system from imploding.

FHA will soon be in a similar untenable position as the government has become the holder of almost all new US mortgage product. If this is not sustained, despite it being a near impossibility to do such, US housing may not just fall further but collapse.


“The great enemy of the truth is very often not the lie – deliberate, contrived and dishonest – but the myth – persistent, persuasive and unrealistic.”

John F. Kennedy

1962 commencement address at Yale University

Americans must face the hard reality that the US is now in decline and rapidly relinquishing its hold as the world’s dominant industrial power.  A serious failure in political leadership to recognize this and act upon it, along with misguided public policy legislation, has hastened the decline.

What this means is that America’s standard of living, which has almost been assumed as a birthright, is now in jeopardy and for the middle class is already in full erosion. America, like all great powers in decline, has become complacent and apathetic with an unjustified sense of entitlement. Americans somehow believe that bad things cannot befall America, as though it is preordained to always be a preeminent power with the corresponding highest standard of living.

The facts are that we are at the precipice of a crushing decline in our standard of living due to fifty years of wasteful spending and bad public policy. We are near or now possibly past the point of no return without bold and rapid change. We need change that can only come from the public’s understanding of what change specifically is required and not just a political billboard proclaiming the ‘change’ mantra at election time.

As we move more and more towards a “have” and “have not” society where the middle class is disappearing and the government is involved in all aspects of our lives and economic well being, we are becoming acutely aware that America is now different. Our perceptions of what America is no longer matches the reality around us on a daily basis. The middle class in America is rapidly disappearing.



Inflation lies ahead
due to all the Government money printing.

Deflation lies ahead
due to deleveraging and banking problems.

Deflation & Inflation
both lie ahead.

- Inflation in what we

- Deflation in what we

Unemployment is a
temporary problem due to a protracted recessionary recovery.

Employment is a long
term chronic problem that is structural in nature.

Credit Availability
will re-ignite the economy.

Easy credit is the
hole we must dig ourselves out of.

Bank Lending is the

Borrowing is the
problem – insufficient collateral and qualified borrowers.

Like housing being a good investment, much of what we hear or believe are false perceptions. We are distracted by these contrived and orchestrated misperceptions from the hard reality in taking the actions required to make real needed change. The US Standard of Living is now on the line.

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Catallaxative's picture

"[...]on the cusp of an imminent and significant collapse in the standard of living for most Americans."

One could say, by design, if you believe that de-industrializing the West is one step in the master plan to reduce the world's population...


HungrySeagull's picture

Unfortunately the EAST (China) is now wanting more stuff and want more. Soon THEY will be IMPORTING stuff from another land that is willing to work for a penny an hour in some dirt factory 20 hours a day.

So I say that the Corporate America and those that decided to export jobs and close factories and industry are the ones who drove a stake into America's Heart.

More Critical Thinking Wanted's picture

So I say that the Corporate America and those that decided to export jobs and close factories and industry are the ones who drove a stake into America's Heart.

Meanwhile China and Germany are also conveying to the US a warm-hearted 'thank you' for all the deindustrialization that the US is performing voluntarily via a blatantly under-sized stimulus, via "austerity" and via tax cuts for the rich - while both China and Germany are stimulating the heck out of their economies. Soon you might only see (cheap ...) models of Mercedes Benz's instead of Chevvies.

I mean, the US had a housing and financial crisis, so clearly it should brutally down-size car-manifacturing, right? To set an example (the bankers and realtors are driving cars, right? They are complicit in the crisis, so punish the car industry too!) and to give up the marketplace to China and Germany?

Also, Boeing and airplanes? Who needs them! They were complicit in carrying bankers! We want an Airbus on every american airfield!

Microsoft, Apple? Downsize them: the quants used Excel and all the bankers are using iPhones ...

Intel, AMD, Motorola? Away with them - all complicit in the housing crash!

Austerity here and now! We want more unemployment, we want more suffering, we want less demand and we want these corporations to go bankrupt. That will show them!

traderjoe's picture

Yes, let's have growth to infinity fueled by debt! We'll sell 16 millions cars/year to people trading in their 3 year old car. They can roll the $10k upside down loan into the new car and be $20k upside down on day one. Yes, let's have every college student be $60k in debt at graduation. They'll make great indentured servants to corporations. Let's park a bunch of perfectly good airplanes in the desert so we can build more. The Ex/Im bank can guarantee the loans. No problem. We'll subsidize housing for $60k per house with a nice tax credit that pulls demand forward. We'll pay people to trade in their perfectly good car and then destroy it and put it in a landfill. iPads and reality shows for everyone! /sarcasm

What is the right level of demand in the economy? Is commercialism/consumerism good? Do we really need more stuff?



More Critical Thinking Wanted's picture

What is the right level of demand in the economy? Is commercialism/consumerism good? Do we really need more stuff?

Just to clarify, are you making the argument that the USA should de-industrialize across the board, regardless of how much a given industry was connected to the housing bubble?

Most of the examples I listed above were awesomely productive industries before the financial crisis. They were not in any sort of bubble and they did not over-extend themselves in any way - they were globally highly competitive industries. They were the crown jewels of the USA.

Fast forward to 2010/2011. Are you arguing that because of the housing crash and the financial crisis all these industries should suffer from the collateral damage of the financial crisis? (Which, due to its central nature, affects every single segment of the economy - even completely innocent and blame-less sectors.)

Why? Because banks and bankers had a monopoly on screwing up the economy (and got away with it) and thus we now must all suffer symmetrically? (and transfer wealth to those who already have capital - which is what deflation does in the end)

Is that what you are saying?

blunderdog's picture

Most of the examples I listed above were awesomely productive industries before the financial crisis. They were not in any sort of bubble and they did not over-extend themselves in any way - they were globally highly competitive industries. They were the crown jewels of the USA.

Yet you included Boeing!  Good heavens, man, Boeing's been propped up by the Feds for DECADES.

If state-capitalist supported "big business" is a crown jewel of the USA, your own case makes the point about how incredibly bleak our situation is.

More Critical Thinking Wanted's picture

Yet you included Boeing!  Good heavens, man, Boeing's been propped up by the Feds for DECADES.

Their executives certainly have a culture of ruthlessly taking advantage of every financial opportunity - government subsidies included.

If you bought BA shares for 50 cents in the 70s you are up more than 100-fold by today (even inflation adjusted you'd be more than 10 times the net worth). Half of the planet is flying Boeing planes today.

Are you making the point that all that should be Airbus instead (another big entity with government subsidies)? How does that help the US? Lead by example of masochistic self-sacrifice?

traderjoe's picture

Um, you included car manufacturing. GM, C didn't receive massive bailouts via taxpayers? GM in its best days didn't make money. Awesomely productive? Were not in a bubble at 16mm cars focused on gas-guzzling SUV's (with oil prices subsidized by a variety of gov measures). 

And your post seemed to suggest that we should support these industries through additional stimulus. That's simply creating/fostering more mal-investment and structural inefficiencies...

The entire economy was over-stimulated on federally subsidized risk and low interest rates. Government debt-linked expenditures propped up the economy - anything from farm subsidies, etc. 

What I'm suggesting is the current structure of the economy needs to be re-set. Too much FIRE income, too much focus on GDP, too much debt, too much consumerism, etc. 

More Critical Thinking Wanted's picture


What I'm suggesting is the current structure of the economy needs to be re-set. Too much FIRE income, too much focus on GDP, too much debt, too much consumerism, etc.

I certainly agree with the too much debt portion. (And I certainly accept your position as a consistent and defendable one)

Yet again, letting the economy deflate (which inaction will result in), increases the real value of debt. I.e. it makes the debt situation worse. It makes it worse for those who are in debt - i.e. those who were losers of the housing bubble and the financial crash. Not the bankers. Not those who have capital. You are talking about increasing the effective debt of the middle class.

Which, if that is what you meant, is a consistent argument. I'm afraid it would only lead to what the 1930s depression led to: a decade of human suffering, followed by exactly the same consumption binges as before.

Do you accept that it's a consistent position to argue that such decade of suffering should be avoided?

chopper read's picture

deflation rewards savers.  more importantly, deflation is a law of financial physics that cannot be eliminated without the complete destruction of buying power.  'The Fed' is betting, for example, that folks are going to need $50k worth of houses and cars before they will need $50k worth of food.  

We have a monetary policy of 'full employment', which essentially means 'constant consumption'.  Hence the myth, "small amounts of inflation is good".  

Sadly, by destroying any incentive to save, we get what we have here today, which is every monkey in our country levered to the gills; by policy design.  'don't fight the trend' and all that.  


Any individual (and I use that term loosely) who did not 'lever up' was at risk of being left behind by their next door neighbor, and fiercest competitor.  Maybe even a sibling would borrow ever greater amounts towards success in return for parental love.  wouldn't that be a terrifying prospect?  So, get with it, borrower and consume!


Our monetary policy statement is rotten to it core by encouraging waste and rabid consumption at every turn.  We, the national livestock, have been born into this 'reality', behaving as our central planners have incentivized us to do.  


Sadly, our central planners, as brilliant as they could be, are 'only human' and eventually get it wrong.  Interest rates, for example, get left too low for too long, and folks price into their private financial projections endless prosperity and a "new economy" eerily reminiscent of the 'roaring 20's'.  Babies are born, houses are built, businesses expanded through aggressive borrowing in preparation for greater heights; bubbles ensue.  


Do the central money planners stop the madness and admit, "we're not up for the job"?  Of course not.  Who would ever vote themselves out of a job?  "Welfare breeds dependency"; our Federal Reserve Bank needs its own flawed policy to exist.  How could they possibly provide the clear solution?

Meanwhile, bubbles pop and contractions come.  Divorces, suicides, and lower birthrates plague the population.  Just as they took credit for the artificial success of easy money, they now blame themselves and each other.   

The benefits of centralized federal governments are highly debatable at best; however, the benefits of central money planning are simply nonexistent by all understandings of history and 'common sense'.  'Expansions' and 'Contractions' become no longer regional and temporary, but rather global and protracted under the watchful eye of our overwhelmed 'leaders'.   

To answer the question "Do we really need all this stuff?":


simply understand that we have a policy of waste and deduct your answer accordingly.  

More Critical Thinking Wanted's picture

'Expansions' and 'Contractions' become no longer regional and temporary, but rather global and protracted under the watchful eye of our overwhelmed 'leaders'.  

That is true - and it is also true that the perverse volatility (and blatant manipulation) of financial derivatives and commodities leads to a steady transfer of wealth from 'financially dumb' to 'financially smart' people.

OTOH isn't this an unavoidable side-effect of global trade? Isn't global trade sometimes beneficial? Say you are a private, free producer of a niche product and have a lot of fun producing that rare kind of flute carved out of cherry tree wood. Won't you benefit from having a global marketplace selling to hundreds of millions of potential customers?

With a local marketplace you'd have a buyer every 10 years perhaps. With a global marketplace you could have a buyer every single day - you couldn't fill in your order book.

The same goes for rare intellectual skills. Are you an expert in ... under-water cave engineering? Do you write some rare kind of software that has no chance on a local market?

And the thing is, the moment you accept that a global marketplace is useful in some circumstances, you have globally synchronized prices. That brings in all the problems, abuse, deformities you are talking about. It also brings tangible benefits. I for one enjoy being able to argue this with you, from another continent, across thousands of miles of open ocean :-)

chopper read's picture

your observations regarding the benefits of globalization are entirely accurate.  Further, no monetary system can eliminate the fact that there are always winners and losers in life. after all, its a competition whether we like to admit it or not.

the challenge is that we have been born into a system of central money planning which causes 'winners' and 'losers' to be entire countries.  So, unlike a domestic dispute over whether or not an apple tree is in my yard or yours, we have 'domestic disputes' in the form of World Wars in competition for continental resources. 

our ancestors traded freedom for safety, by allowing the creation of, first, central money planning and, second, faith-based money that cannot be exchanged for gold (or silver).  As a result, we have become productive livestock to be 'incentivized' in one direction or another via the manipulation of our tax code or sent off to foreign lands to clash with our 'Nation-State' neighbors. 

We are not safer, as was promised by those who sold us on central money planning.  We continue to suffer and be placed in MORE danger; the euphoria and pain is multiplied exponentially for each one of us the further away we are from the actual decisions being made. 

The true power of REAL capitalism, as opposed to central planning of any kind (Communism), is that it decentralizes 'winners' and 'losers' rather than concentrating them into aggressive Nation-States, such as the Germans and Japanese during WWII, and potentially ourselves and the Nation-States of the Middle East today.


Yes, we all benefit from niche producers gaining access to both the flow of investment capital and the global marketplace.  However, there is nothing to suggest that we need central money planning or faith-based money in order to achieve this.  The USA, for example, functioned more efficiently in this manner before the creation of The Federal Reserve Bank in 1913 and the removal of the gold standard in 1971.  

It is quite clear why Federal Reserve member bank shareholders prefer this system.  However, it is entirely counter to both our Constitution and our best interest, the consequences of which are no less than our eventual extinction as lower members of the food chain.   

More Critical Thinking Wanted's picture

Yes, let's have growth to infinity fueled by debt!

I do not make that argument - infinite cycles of debt will lead either to hyperinflation or to a default.

The argument I'm making is what many have made already: that the output gap should be closed in a one-time event - so that the economy gets out of its recursive depression death-trap. The current US output gap is very much finite - about 4% of the GDP.

traderjoe's picture

4%? How was that number calculated? 

When the Fed Gov is running 50% budget deficits, states/muni's in huge trouble, etc., I don't know how you could calculate a particular output gap that would be a sustainable number given the current issues. 

And why is GDP the measurement of a healthy society?

More Critical Thinking Wanted's picture

4%? How was that number calculated?

The US 'output gap' is the difference between 'current output' (production of the US economy) and 'potential output'. It is estimated by looking at industry production capacity utilization rates, the real-GDP trajectory and similar data.

It is a well-established metric in economics and it can be measured fairly reliably:

(although you should certainly ignore any numbers beyond the first decimal place - even 0.1% accuracy is probably flattering.)

The keynesian approach to demand shock crisis management is to close temporary gaps in the output, and to raise interest rates later on to increase savings. I.e. save in the good times, spend in the bad times. This saves the 'innocent' sectors of the economy (which had nothing to do with the housing bubble) from collateral damage - and also serves the national interest by keeping the US economy globally competitive. But the primary effect is that it also avoids mass unemployment and long-term unemployment - both of which are main drivers of depression cycles.

The austrian approach to demand shock crisis management is to save more and thus to let economies shrink freely until gravitation and other forces catches them. The 1930-1942 Great Depression was such an episode of excessive savings. (Note, as you can see I cannot really agree with Austrian economics, as I simply dont see it matching/predicting reality in many important economic scenarios, so my characterisation of it might be unfair/biased.)

You can fairly pick any side in this argument, but what is disingenious is to claim that the keynesian approach is to spend, spend, spend in an unlimited manner. It is not - there is a very specific, numerical amount of spending that can avoid the depression, which number comes straight out of the economic models. Those models did not need any changes in 2008.

If you check the link above, the current US output gap is 3.7%. The US output gap was roughly 8% when the stimulus was enacted - the stimulus roughly accounted for a 4% close of the output gap. (i.e. was half as big as it should have been)

The current US output gap (about $500 billion) is less than 15% of what the war in Iraq has cost US taxpayers so far (3+ trillion). It is less than 25% of the cost of the Bush tax cuts (2+ trillion). And closing it would likely prevent a Japanese-style "lost decade" of deflation.

Btw., if QE2 indeed happens, watch for that number to match the output gap. I predict an at least $500 billion QE2 nominal value - potentially up to twice that size for the 'shock and awe' confidence effect.

More Critical Thinking Wanted's picture


And why is GDP the measurement of a healthy society?

It certainly isn't - but there's a very strong observed correlation: people in low per capita GDP countries tend to be in less healthy societies by many (materialistic) metrics. They also tend to desire to live in a higher per capita GDP country. They want this to happen either by their country growing (the slow road) or by them migrating to a richer country (the fast road).

There is also a strong observed correlation between a sudden drop in per capita GDP and general unhappiness in the society. It usually results out of people not being able to do what they did in the past anymore.

Is GDP a metric of 'health'? Nope. But it's certainly part of the picture. I've yet to see a historical example of a country going through heavy deflation and with the population ending up happy with that result.

Do you claim deflation is a good thing to have?

Bringin It's picture

Here here ...growth to infinity fueled by debt!

Show me the way to the next whiskey bar.  Oh don't ask why.  oh don't ask why.

minus dog's picture

"Yes, let's have every college student be $60k in debt at graduation. They'll make great indentured servants to corporations"

$60k is a bit low, unless you're talking just a 4 year degree from a small state school.

And even then, virtually any graduate can now get the .gov to write off all their interest over the life of the loan, and in some cases even a large chunk of the principle.  They're subsidizing overpriced, poor quality educations for any number of reasons.

The "stuff" I have a demand for consists of things that help me live.  Tools, food, things to make food, clothing.  In that sense, people have been buying crap for a couple of generations without actually getting their hands on anything meaningful or of lasting value.

masterinchancery's picture

You are missing the important stuff; ridiculously high business tax rates, an EPA that has eliminated whole industries from our country, and has prevented us from exploiting huge energy resources; an education "system" designed for the benefit of public employee unions, with ever more dismal results in terms of learning, and a legal system that preys on legitimate business.  Until this stuff is fixed, we don't stand a chance.

masterinchancery's picture

And I didn't even mention the catastrophic effects of unsupportable debt, fiat money, or the Fed!

minus dog's picture

It doesn't need to be fixed, it needs to be made an example of.  In the "burn, plow under, salt" sort of way.

B9K9's picture

There is a strong possibility that the ‘Jaws of Death’ is an orchestrated plan to reposition America’s standard of living.

You think so? No, no, no, say it ain't so Joe! Here's what I find mildly humorous: Various proponents from all stripes of the political spectrum vociferously debate the merits of different hot button topics like peak oil, environmental degradation, resource collapse, population carrying capacity, etc.

Yet the same types of smarty pants who orchestrated our fiat credit regime 316 years ago (home office - regional was established 97 years ago), and have skimmed off $trillions of real productive wealth as their reward, don't waste their time debating the merits of such piddling issues.

Rather, a dispassionate analysis of the life span of any eco-system, regardless of species (including us of course), tells anyone who cares to look all they need to know. And that is that the power-elite must re-position themselves to continue enjoying the fruits of consitent and constant interest bearing loan growth in a post-resource, post-industrial environment.

You & I are mere digits on a spreadsheet - just chits to record wins & losses. America as an idea served as an excellent vehicle to advance their interests @ a specific time & palce. And boy, did the rubes ever buy the notion of self-governance hook, line & sinker. Jeez how they must laugh at our pathetic efforts! However, it's getting about that time  to once again pack up the carpet bags and move on to the next prospect(s).

Our only possible way out is a revisit of 1789. Even if the people are successful and implement important monetary and banking reforms (taking bankers out of control and consigning them to utility functions), how long will it last before the siren song of corruption once again causes "leaders" to sell out their constituents for the proverbial 30 pieces of silver?

Still, what must be done will eventually be done.

cossack55's picture

Go long knitting needles.

Babalooee's picture

touchy times indeed when the knitting needle comments get junked

themosmitsos's picture

It's not the WEST'S population that needs to be reduced.


RobotTrader's picture

I think Rasputin has summed up everything right here:


Ras never thought debt could be so beautiful.

- Sat, Sep 18, 2010 - 10:58 PM

However, this chart below (courtesy of Karl Denninger at The
is actually appealing in its exponential growth and pleasing in its
color scheme.

Image #1:

(Ras Conclusion): See? Runaway debt growth is a beautiful thing,
not an ugly one. Also, please note that in 1980 the total U.S. debt
first hit a measly five-trillion fiatscos. It was at that time a young
and full-of-vinegar Ras started his scroomage-screeching career.

"This can't go on!" he lamented to his lamb peers.

..."Any minute now, I swear..."

Which are dangerous statements to make.

Dangerous to one's financial health, that is.

For, Ras recalls screeching one or both of these warnings at
various points in the previous thirty years, such as:

1. 1980, when Uncle Thug first reached 1 trillion fiatscos of
sovereign debt, and overall debt hit 5 trillion

2. In 1987, when the stock markets crashed

3. In 1990, when the S&L crisis was in full swing and nearly
1000 institutions failed

4. In 1997-1998, during the "Asian Crisis" and Russia/LTCM collapse

5. In 1999, when Ras saw the Internet/telecom bubble being inflated

6. In 2002-2003, after the stock markets crashed

7. In 2005-2007, when again Ras witnessed the McMansion mania in
full bloom

8. ESPECIALLY in 2008-2009, when the entire financial system

...yet, each and every time without fail or exception, credit
growth has continued unabated, the world muddled through, the Alpha
Thugs remained in charge, the sheeple remained stupefied and NOTHING
changed in terms of reforming the corrupt, fraudulent fiat/fractional
reserve lending/central banking scheme.

(Ras Conclusion): Be careful when predicting the end of the Ponzi
Pyramid of Debt and Derivatives Death.  One could waste a lifetime
waiting for it to transpire.


And now Jim Willie suddenly chimes in:

Or so screeches the T-shirt wearing
self-proclaimed "Golden Jackass".

Here is an excerpt from one of his screeds:

"Unless the Fed jumpstarts their next quantum stage of
monetization, lapping up Asian supply, long-term US rates would rise to
sabotage any hope of economic recovery. Other Asian holders might follow
suit. A threat overhangs the US mortgage market, and thus real

And exactly WHEN did "Wet Willie" warn that the Asians were gonna
pull out any minute now, he swore, from funding Uncle's profligacy and
that the Fed would NEVER buy any more Treasuries?

How about over SEVEN YEARS AGO?!!!

Don't believe a Mad Monk when he tells you this?

Okay, read it for yourself here:

...where all the way back in 2003, poor hapless Jim was screaming
"This can't go on!".

Here is another "pearl of predictive wisdom" from Jim's lips:

"The Japanese may be the first nation to back out of US securities,
in response to their own bond revolt. US Trez bonds may have been sold
in order to cover their domestic losses."

(Ras): LOL. The Japanese have DOUBLED their holdings of U.S. debt
since Jim shrieked "They're gonna pull out!!!" Not to mention that China
was hardly even a blip on Willie's radar at that time.

(Ras Conclusion): Is it just Ras, or have other long time
perma-gloomers noticed that the same old, tired screechers of scroomage
continue to be perpetually wrong?

MsCreant's picture

Just because it hasn't doesn't mean it won't. Hope for the best, prepare for the worst.

Village Idiot's picture

Hope for the best, prepare for the worst."


Words to live by!  It applies to economies and people.


RockyRacoon's picture

The last few quarters of that chart of growth is telling the tale.

Watch out for reversal.  It will not be pretty.

MsCreant's picture

And all sorts of weird things get counted in the GDP that are very questionable as "growth" when you consider all the government spending that goes in there to puff the number upwards. The debt is under reported because of losses not yet claimed from housing and the other exotic products being bought by the fed (and backed by the treasury) to prop things up. Yeah, I think it is pretty arrogant to assume that because it has not yet fallen apart, it will limp along. My family members are starting to feel it. Folks are starting to need "help" if you know what I mean.

RockyRacoon's picture

You are correct, Missy.  I know some people who are quite proud and cannot admit, let alone ask, that they need help.  A lady friend who knows I sell on eBay just asked if I could sell some of her silver rounds (a set of the stuff that was marketed 10 or 15 years ago by subscription).  They are 2 ounce .9999 fine, but not easily marketed as a set for collectors.  I will offer her 80% of spot after next week.  Waiting for a hit to the metals to drop the price.  I don't really need/want the silver, but she needs the money.  At least she keeps her pride and I get an appreciable asset.  I call that a good deal for both.  The transaction, as you point out, will not appear in anybody's statistics.

Misstrial's picture

Greetings - Long time ZH (2007--->) reader here, and finally, *finally* a member.

Why so long? Spam filters eliminated "info" emails perforce.

Rocky: I'm an eBayer with 150+ all-positive feedbacks.

Your lady friend asked you to sell her silver rounds on eBay, why can't you comply with her request?

Most likely she would realize a greater profit if you were to sell these as coins with the coin premium than if you were to buy these from her at 80 percent of spot.

How are her rounds packaged? In sets that are PCGS hologrammed? 

I see you've been junked however it appears from your post that you are taking advantage of someone you describe as a "friend."



RockyRacoon's picture

Hello there.  Not sure about all the junks on that post.  Kinda weird.  I guess some folks may think I'm taking advantage of someone who needs the money.  Her other option is to consign them and pay a 70/30 split (her 70%, of course, and I pay all sales cost out of my 30%).  Anyhow, selling them outright would net her more.  They are not coins, they are silver rounds (ingots I think, have not seen them yet).  I have over 10,000 feedback posted with 100% positive.  I've left over 21,000 feedbacks on eBay, but all buyers don't leave feedback.

Or, the other alternative for my friend is for her to take them to the local coin shop or one of those "We Buy It All!!" folks at some motel.  I'd sure hate to rip her off. </sarc>

What_Me_Worry's picture

People forget there is about 9% commission on Ebay, plus Paypal fees, plus shipping costs.  It could be hard to net anything close to spot on something that isn't very well known.  Plus, if you don't have a high enough feedback, you won't obtain as high a price.

Although, idiots keep bidding up all of the fake gold pandas from Chinese sellers.  Apparently, those people hate money so much they will buy fake gold coins with it.

RockyRacoon's picture

Alfred, I think my net would be about 15% to 16% since most people use Paypal and there is another whole new set of fees.  I do accept and process credit cards but the fees are about the same as Paypal.  Plus I gotta pack and mail the stuff.  Let's not talk about the scanning/photographing, describing, posting and babysitting deadbeat buyers.  Thanks for your boost.

HungrySeagull's picture

I used to sell on ebay and I am always careful to build in the 15-20% extra plus shipping costs into a item to sell as long as the total bid is less than retail MSRP minus typical shipping.

When paypal froze money for new sellers for 21 days or more, with automatic clawbacks if a buyer so much as complains at any time I got out.

I still use Ebay as a buyer and not paypal. I always pay with (Seller's prior permission) US Post Money orders.

Snidley Whipsnae's picture

I sold on Ebay from 1998 - 2001... mostly old, collectible knives from Case, Remington, Winchester, Puma, etc. After 2001 (9-11) my sales dropped drastically...and I had a good buyer following and good reputation built up from prior years. Most of my good buyers just vanished.

My sales were difficult and time consuming for I took a lot of good photos and described each knife in detail and graded it...similar to coin grading.

When ebay began changing the rules and my profit margins became too thin plus ebay was invaded by hordes of scammers I got out. I have over 2200 positive seller feedback and  99.9% positives and I still occasionally buy an item or two.

Here is an anecdotal for instance...I have collected antique motorcycle sew on patches since I was a kid...I have over a thousand of them...I know a real one from a about 99% or more of the 'antique' motorcycle patches listed on ebay are reproductions and some are 'artificially aged' to make them look authentic. It's pathetic.

Even collectible 'old' Levis jackets are being made in SE Asia and sold as originals on Ebay.

RockyRacoon's picture

Thanks for your comment.  The problem with selling bullion on eBay is that you can't build in any extra.  It sells for spot +/- just a tad.  Shipping costs are pretty fixed as well since ounces are ounces.  There is very little "spread" with selling coins in general.  Bid/Ask is a carefully tracked metric within the industry.  Margins are thin!

And to Mr. Snidley's comment:  There have always been counterfeiters, in all areas, at all times.  The internet has made the spreading of the goods easier.  As I have always said, KNOW YOUR SELLER/BUYER.  Doing due diligence in an eBay transaction is no different.

Misstrial's picture


OK, thank you for your reply. I'm not a seller, and I understand that eBay has increased their take on sellers - so much so that some sellers have left to go to another site.

And your many feedbacks would make you a Power Seller - do you have a Store?

If your friend can hold out for a short while, some are estimating that silver may go up to $50/oz.

I also understand the shipping costs, however, that is usually tacked on at the time of payment - I do PayPal exclusively.


RockyRacoon's picture

I sell at my own website, eBay, BidStart, a couple of other lesser sites, and have an eBay Store which has over 2,000 items in it.  At one point I had over 5,000 Store listings but I let the Store diminish by attrition due to eBay's constantly changing policy.  I just refused to keep up with their crappy rules and attitudes.  I don't worry much about the Power Seller stuff since that is a gimmick to me. I also belong to the American Philatelic Society, the American Numismatic Society, and several other professional organizations.  Selling is fun and most people are very fair and honest.  I've had a couple of bad checks over the years and only 1  not made good.  It's a lot of fun for the most part.

Dismal Scientist's picture

Just because you're paranoid ... doesn't mean they aren't out to get you.

traderjoe's picture

Robot - I get your point concerning the possibility of making money in up and down markets. I think/hope much of the concern expressed generally on this website moves beyond the daily ups/downs of stocks/markets and looks at broader economic and liberty issues. Record numbers of foreclosures, student debt (indentured servants to corporations/state), food stamps, poverty, etc. are relevant and pertinent facts concerning the economic and social pain being felt in the country. Much more important than whether PCLN goes up and down for a day. 

So, yes, all of these people might have been early. But doesn't make them wrong. They are warning of the imbalances, instabilities in the system. Was a warning of sub-prime wrong in 2004, and to miss the 20-30%+ move up to 2007? 

Washington state is going to cut it's budget 6% across the board for the remaining 9 months of the year. More budget cuts loom next budget. Where are the CA and IL budgets? Illinois has $5 billion in unpaid bills. Imagine being a contractor to IL and having a 180-day receivable. 

How about the freedom and liberty issues? The bureaucracy issues? The $600 1099 reform amendment failed in the congress. How will small businesses issue thousands of 1099's and still remain competitive?

Economic health is more than a stock market moving up or down. These individuals are canaries in the coal mine, and trying to waken the sheeple to take a hold of their economic and social futures. It's an important message, but too often drowned out by the platitudes offered by the MSM and the PTB...

RockyRacoon's picture

Just a comment on the 1099 reporting:  The IRS is considering excluding reporting of transactions that are made with debit or credit cards.  I presume that is because the public will think that the transactions are being "tracked" by somebody who cares.  That is wrong, of course, but a relief from the reporting burden.

You -- or anyone who is interested -- can contact the IRS for commenting on the whole shebang this way:

email the IRS with "Notice 2010-51" in the subject line to

Or, you can write to

Internal Revenue Service, CC:PA:LPD:PR (Notice 2010-51)

Room 5203

P. O. Box 7604

Ben Franklin Station,  Washington DC  20044

Speak your piece.  They don't read blogs...

unununium's picture

Speaking of Jim Willie, this Gordon T. Long article contains the same Time cover comparison and shadow banking charts as the current Jim Willie HTL.  Neither attributes the other, who is doing the work??

QQQBall's picture

Who Did the work?


TIME did!

masterinchancery's picture

When the interest can't be paid without flagrant money printing, the game will be over.