Guest Post: Why Growth Is Dead

Tyler Durden's picture

Submitted by Chris Martenson

Why Growth Is Dead

The end of the second round of quantitative easing (QE II) is going to be a complete disaster for the paper markets -- specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. The only thing that will arrest the plunge will be QE III, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is. Perhaps it will be known as the "Muni Asset Trust Term Liquidity Facility" or the "American Prime Purchase Program," but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.  

A Premature Victory Lap

Bernanke recently stood at a lectern and announced to the assembled audience that the Fed's recent policies could be credited with elevated stock prices and an improved employment statistic while somehow keeping inflation low. 

It was his own version of a 'mission accomplished' speech, just like the one GW Bush gave. And similarly, it does not mark the end of significant difficulties, but the probable beginning of a very long period of treacherous economic and financial disruption.

Here's one recent version of how the Fed's actions are being interpreted, courtesy of Bloomberg:

Bernanke’s QE2 Averts Deflation, Spurs Rally, Expands Credit

Ben S. Bernanke’s $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.

The Standard & Poor’s 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.

“Looking at market indicators, you have to be convinced it’s been a success,” said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. “When you get into periods of aggressive central bank easing, and we’re clearly in the most aggressive period of easing that we’ve ever seen, the markets tend to lead the real economy.”

A rising stock market, low inflation expectations, and lots and lots of cheap credit for even the riskiest companies. What's not to like?

The main problem is that this is all an illusion. If it were truly possible to print one's way to prosperity, history would have already proven that to be possible, yet such efforts have always failed. The reason is simple enough: Money is not wealth; it is a commodity that we use as a temporary store of wealth. Real wealth is the products and services that are made possible by an initial balance of high-quality resources that can be transformed by human effort and ingenuity.

For some reason, however, this basic concept has managed to elude the high priests and priestesses of the money temples throughout time. Somehow it always seems compelling to give money printing a try, maybe because this time seems different. But it never is. And it's not different this time, either.

Even as the markets are beginning to correct in anticipation of the end of QE II (which I predicted in my newsletters as early as March 8, 2011), we should note that the Fed is still pumping an average of $89 billion per month into the markets.

When we compare the $370 billion that the Fed has printed and placed into the financial system year-to-date against the levels of money flows going into and out of mutual funds, exchange-traded funds (ETFs), and money market funds, we observe that the Fed's actions swamp those flows by a factor of roughly 2:1. That is, the amount the Fed is putting in is quite significant, and its disappearance from the markets is something that needs to be carefully considered.

On the plus side, we can all be thankful for the one thing that money printing can do, and has done, which is buying a little more time for everyone. As I consistently advocate, such time should be used, at least in part, to ready oneself for a future of less and to become more resilient against whatever shocks are yet to come.

While money printing can so some wondrous things in the short term - (Hey, give me $2 trillion to spend and I'll throw a nice party, too!) - it cannot fix the predicament of fundamental insolvency. The United States has lived beyond its means for a couple of decades and promised itself a future that it forgot to adequately fund. The choice that remains is between accepting an unpleasant but relatively steady period of austerity leading to a new lower standard of living -- and a final catastrophe for the dollar. The former is akin to walking down around the side of a cliff, and the latter is jumping off.

Too Little Debt! (or, One Chart That Explains Everything)

If I were to be given just one chart, by which I had to explain everything about why Bernanke's printed efforts have so far failed to really cure anything and why I am pessimistic that further efforts will fall short, it is this one:

There's a lot going on in this deceptively simple chart so let's take it one step at a time. First, "Total Credit Market Debt" covers everything - financial sector debt, government debt (fed, state, local), household debt, and corporate debt - and is represented by the bold red line (data from the Federal Reserve). 

Next, if we start in January 1970 and ask the question, "How long before that debt doubled and then doubled again?" we find that debt has doubled five times in four decades (blue triangles).  

Then if we perform an exponential curve fit (blue line), we find a nearly perfect fit with an R2 of 0.99 when we round up. That means that debt has been growing in a nearly perfect exponential fashion through the 1970's, the 1980's, the 1990's and the 2000's. In order for the 2010 decade to mirror, match, or in any way resemble the prior four decades, credit market debt will need to double again from $52 trillion to $104 trillion. 

Finally, note that the most serious departure between the idealized exponential curve fit and the data occurred beginning in 2008 -- and it has not yet even remotely begun to return to its former trajectory.

This explains everything.

It explains why Bernanke's $2 trillion has not created a spectacular party in anything other than a few select areas (banking, corporate profits) which were positioned to directly benefit from the money. It explains why things don't feel right, or the same, and why most people are still feeling quite queasy about the state of the economy. It explains why the massive disconnect between government pensions and promises, all developed and doled out during the prior four decades, cannot be met by current budget realities.

Our entire system of money, and by extension our sense of entitlement and expectations of future growth, were formed in response to and are utterly dependent on exponential credit growth.   Of course, as you know, money is loaned into existence and is therefore really just the other side of the credit coin. This is why Bernanke can print a few trillion and not really accomplish all that much. It's because the main engine of growth is expecting, requiring, and otherwise dependent on credit doubling over the next decade.

To put that into perspective, a doubling will take us from $52 to $104 trillion, requiring close to $5 trillion in new credit creation during each year of that decade. Nearly three years have passed without any appreciable increase in total credit market debt, which puts us roughly $15 trillion behind the curve.

What will happen when credit cannot grow exponentially? We already have our answer, because that's been the reality for the past three years. Debts cannot be serviced, the weaker and more highly leveraged participants get clobbered first (Lehman, Greece, Las Vegas housing, etc.) and the dominoes topple from the outside in towards the center. Money is piled on, but traction is weak. What begins as a temporary program of providing liquidity becomes a permanent program of printing money, which the system becomes dependent on in order to even function.

In addressing these questions in Part II of this report: Positioning for the Coming Rout, I have become increasingly confident that the Fed's efforts to exit quantitative easing will lead to a substantial market rout that will roil all asset classes this year. That's just the short-term outlook. Continued and eventually greater turbulence will result from the government's subsequent response.

Click here to access Part II (free executive summary; paid enrollment required to access) for specific predictions on what to expect in the months ahead as well as recommendations for protecting your wealth.

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LawsofPhysics's picture

Ah, the delta function is finally catching up with us.  hedge accordingly.

Cash_is_Trash's picture

...but, but, Ben, Tim and Barry assured we were growing!

Hard1's picture

Yes, let's just find a new buyer of UST's to substitute China, now we only need 2 Trlln.  I've heard there are some aliens in an outer galaxy interested on exporting stuff to the USA in exchange for IOUs.

Slash's picture

the fed's got some tricks up their sleeve. "everyone" knows markets will tank with the end of QE 2....which means they won't. Maybe a hiccup or two, but it's too critical for the kleptocracy to keep the illusion of prosperity alive. I would think stocks will somehow levitate while commodities correct hard as that is obviously what the psychopaths want.

Coast Watcher's picture

Agree. No way the markets tank going into an election year.

Slash's picture

We'll probably see mysterious bidding at treasury auctions (once the grandstanding is done and ceiling is rasied) from money centers/offshore havens all over the world. The game of buy the bond flip back to the fed isn't over by a long shot. I wonder if the fed's balance sheet will show anything in terms of increasing asset purchases though.....



Robslob's picture

Election Year is 2012...not 2011.

Bicycle Repairman's picture

What kind of year was 2008?  It doesn't matter who gets to play puppet.

CIABS's picture

re: Coast Watcher

stocks will tank before an election if it will affect the outcome in the desired way, as happened in 2008.

blindfaith's picture

spot on.......and behind the scenes the vote manipulation has been is high gear for months.  Who will win, the corporations or the financials?  And, we thought it was all about blue and red, and the constitution, apple pie, and prayer.

hbjork1's picture

Folks, the artificial "growth" of easy money may be dead but real growth is not dead.  In between ZH postings, I am scanning trade magazines of various sorts.  The one in front of me right now is "Test and Measurement World.  The editorial title is "Game changers in test-part 2" 

Change is upon us all. 

I felt relieved by the performance of Seal Team 6.  Our country didn't "screw up" that at least.  But those TEAM members were the best of the best and they all paid a considerable personal price to be in that condition of readiness. 

I have to contrast this training level (for an assassination) with the financial lights setting policy for the entire country.  Greenspan has become a joke.  And the financial educators (including Merton), until this decade at least, realized that standard statistics that were for random events, could not be reliably applied to human decision processes. 

A couple of weeks ago I had dinner with a friend who was an early worker in computer modeling of chemical reactions.  A few decades ago, he had published a book, "Methods in molecular orbital theory".  Because I had been interested in what kind of math might be applied for a closer approach to better financial analysis, I had once ask him about his book.  It's a little book, shouldn't take too long to get a picture of the math with some bedside reading. 

He brought me his copy. 

I am still working on the "Schrödinger Equation" (bottom of page 1).   

Anyone reading this that thinks you could make a contribution in this area should check out his methodology.

Bicycle Repairman's picture

Dude, that was one giant non sequitur.

NewThor's picture

Ben Bernanke says "I am Shiva destroyer of worlds. Pain and 

suffering are my drugs of choice. I will overdose on pleasure

as the world collapses into a chaotic black hole of currency collapse."

blindfaith's picture

Guilt is a miserable ghost to have haunt you.  Ben is a Narcissus, they have no such ghosts.

Sudden Debt's picture

If it worked....






dalkrin's picture

All that surge in credit with its jump-off point in the early 70's.  Hmm, what happened back then?  Oh yeah, Nixon severed the gold-tether, and away we floated like a balloon.

besodemuerte's picture

So should we expect 20% and 50% gains by October then?  Because we all know Benny Bucks won't let us crash.

zeek's picture

Isn't China trying to make our 'gyrations' irrelevant in the commodities arena, or am I just reading too much into the HKMEX offering contracts in yuan?

LawsofPhysics's picture

I saw that, fast learners aren't they?  Now about that "deliverable gold", you will accept these yuan instead.

j.darkness's picture

Commodity Relief Assistance Program, aka C.R.A.P.

TheGoodDoctor's picture

+some two ply. We are going to need it.

Eally Ucked's picture

You my friend are a bit of the sinc, I would say, your economy depends on them even to produce nail polish! What you have to offer to the whole world? Your services? Good luck!

Dr. Richard Head's picture

Speculator Halting Initiative Transactions

NotApplicable's picture

I've got it on good authority that they're considering calling it the

Financial Asset Security Clearing Inventory Sustainability Method.

j.darkness's picture

++ to you and Dr. Head, thanks for playing! 

Tic tock's picture

Oh you fuckin wish,

falak pema's picture

growth is not dead in DC, 'cos negative growth is very much there!

buzzsaw99's picture

qe infinity bitchez

SheepDog-One's picture

Its not early 2008 anymore, the exuberance that 'this TARP thing hmmm it really might work!' and subsequent QE's is now seen as bailing out bankers only, no benefit for anyone else in a collapsed economy. Another round of it, no matter what they try to name it, will likely just cause a total wipeout. Last days of the empire here.

trav7777's picture peaked at the same time as oil production did

nmewn's picture

You guys run in pairs...that is interesting.

CrashisOptimistic's picture

It is astonishing how people cannot figure it out.

NotApplicable's picture

Ever try to explain to someone how our money is nothing but our own debt? Instant eye glaze. Honestly, I'm astonished that so many have figured it out.

To the masses money = money is about as in depth as the logic gets, because the next step is no better, and with the circular logic, the spiral of wealth transfer over time goes unseen. Here's the whole conversation.

Q: "What's a dollar?"

A: "It's a promise to pay."


Q: "Pay what?"

A: "A dollar."


Q: *drools*

John Skookum's picture

The real fun will come when BernankeBux are no longer accepted in payment of taxes.  Specie, foreign hard currency, or in-kind only, thank you. 

NotAllowed's picture

Perhaps they want a system implosion.  How else will they be able to not pay any SS, Medicare, and Medicaid benefits.  I'm thinking this is an engineered collapse, if not than QE has to happen.

Ying-Yang's picture

Not Allowed... I've been thinking the same thing but then we would be called conspiracy theorists.


System fail and PTB restart NWO the way they please.

FlyPaper's picture

Have talked this over with several people.  If you wanted to fix the US Economy (and Obama knows what is happening) - why would you jump in with a budget-busting entitlement like Health-care?  Why would you run 1.6t deficits?  Why would you stop new oil drilling in the gulf?  Why would you pass "finance reform" and fail to reign in taxpayer-insured entities like the too-big-to-fails?  

Either the big O is brain-dead (he's not) or he has another agenda.  Perhaps: Hope and Chains?

SheepDog-One's picture

For everyone convinced we just 'QE to infinity', do not forget the obvious fake 'Bin Laden assasination' setup for the terrorist attacks on major US cities the govt is presently warning us about. Theres a LOT of other things going on in the world other than just printing money to pump up stocks. Stock markets are not the end game, just a diversion from the REAL game.

aerojet's picture

You got two junks, but the whole Bin Laden thing stinks to high heaven.  They killed the  actor who played Bin Laden and CIAQaeda even made a press statement to corroborate it, which to me was the tip-off.  Al Qaeda is not real.  The people fighting the US in Afghanistan are an insurgency, but they are not Al Qaeda.  It's our own tax dollars on both sides.

Abitdodgie's picture

Dirty bomb before June 10th major US city.

j.darkness's picture

I agree, definite set up for false counterstrike.  I think also nuclear, but where?  wont be LA cuz we need hollywood to manufacture consent.  Probably not san fran cuz wiping out silicon valley is bad for the MIC.  Atlanta?  Also has to be a credible target, houston?  where was that FEMA exercise a couple of years back where 7000 people were evacuated?  BTW lets hope FEMA NLE 2011 is just an exercise!

smlbizman's picture

and it will be blamed on iran than we will invade, blah blah...they just dont care about appearance at all