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Quantitative Easing Has Been A Monetary Failure; Persistent Deflation Means More Fed Intervention Coming Soon

Tyler Durden's picture


As more and more pundits discuss the spectre of inflation, with gold flying to all time highs which many explain as an inflation hedge, not to mention stock price performance which is extrapolating virtual hyperinflation, the market "truth" as determined by Fed Fund futures and options is, and continues to be, diametrically opposite. In fact, compared to even a month ago, the percentage of market participants who see the probability of the Fed rate as determined by the June 23, 2010 FOMC decision, at 0.5% and/or below is 88.4%, nearly double the 46.2% on October 1. In a little over a month, the inflationists have gone from being a majority to being barely over 10%! Whether this is due to the continued "exceptional" language in the most recent FOMC statement, or due to the continued deflationary deterioration in the economy, is frankly, irrelevant.

Another way to observe just how much credibility Mr. Geithner has with his daily claims of "dollar strength support" is the below chart tracing the convictions of those believing the Fed Fund rate will be at or below the current baseline of 0-25 bps. As one can see the yellow and red line have hit records: virtually nobody believes that even in 6 months the Fed will do anything to increase rates, regardless of how much liquidity they pump into the system, regardless of what happens to M2 and M3, regardless of whether gold or the S&P hits the 2,000 mark (and one or the other very well might).

The most graphic way to visualize this is based on actual Fed Fund futures and options: the below charts demonstrate the path of highest probability determined by actual traded instruments. It is one thing to parade on TV how inflation has gripped the economy and how people should spend, spend, spend or in the worst case speculate, speculate, speculate by buying GE stock that trades with the volatility of a Tasmanian devil on crystal meth.

The rate probability determined by the futures spot curve a year from now suggests a Fed fund rate of about 0.65% (yellow line). The most likely path probability (thick red line) ends at about 0.75% a year from today. The Fed is certain to do nothing to the rate until June of next year.

Yet even expectations may not be reflecting reality, when reality is massaged and doctored courtesy of factually plain wrong or "adjusted" economic releases by the government. The reason why even micro-inflationists may be wrong is that if one takes the Taylor Rule and extrapolates into the future, based on realistic assumptions, the outcome is quite shocking.

The chart below demonstrates what the implied Fed Fund rate should be today based on the Taylor Rule: a whopping -6.15%! In other words, due to the Fed's inability to charge people money to hold monetary assets (negative rates), QE is expected to inflate assets to the point where the deteriorating economic data drowns out the implied negative number. In practice, the Taylor result means that the economy is still bogged down in a deep deflationary slump. One side effect: look for Excess Reserves to keep rising so long as the direct threat of deflation not wiping out trillions of bad debts at bank balance sheets, persists. Another side effect: look for the Fed's "assets" to start growing exponentially quite soon as the deflationary threat truly takes hold.

What few people realize and what is most troubling, is that despite the Fed's QE program, the current Taylor implied Fed Fund Rate of -6.15% is in fact lower than what it was in January 2009: as we discussed at the time, the Taylor implied rate then was a deja vuish -6%. And this was just as Ben Bernanke was finalizing the $1.7 trillion Quantitative Easing inflation/liquification program. It stands to reason that Quantitative Easing has been not only a failure, but has resulted in a monetary environment that is actually worse than it was at the peak of the crisis. That's what central planning intervention will do an otherwise efficient economy.

So what happens if we project into the future? There is no sense in trusting the government to provide objective data: recall that recently the BLS itself stated that it was going to reduce payroll data by over 800 thousand. As a result we perform a hypothetical extrapolation into the future, using David Rosenberg's estimate of a baseline 13% unemployment into 2010. While the number is likely aggressive (yet real unemployment is materially worse: plugging the U-6 number of 17.5% into the Talor equation and you get a ridiculous, and hopefully, unrealistic deflationary number), we believe we are too generous with CPI estimates, which will likely continue being persistently low for a long time, especially with such government subsidy packages as Cash For Clunkers. As a result we get a Taylor implied rate of -4.2% by October 2010.

All this means is that Bernanke is very likely about to unleash Quantitative Easing 2: If the $1.7 trillion already thrown at the problem has not fixed it, you can bet that the Chairman will not stop here. Furthermore, as the Fed has the best perspective on the economy, which is certainly far worse than is represented, the Fed has to act fast before things escalate even more out of control. Which is why Zero Hedge is willing to wager that not only will the agency/MBS program not expire in March as it is supposed to, but that a parallel QE process will likely begin very shortly.

The end result of all these actions, of course, is that the value of the dollar is about to plummet: when Bernanke announces that not only will he not end QE but that he will launch another version of the program, expect the dollar to take off on its one way path to $2 = €1. And when that happens, look for global trade to cease completely. In its quest to continue bailing out the banking system and rolling the trillions of toxic loans it refuses to accept are worthless (for if it did, equity values in the banking system would go, to zero immediately), the Fed will promptly resume destroying not only the US middle class, but the entire system of global trade built through many years of globalization. Look for America to end up in an insulated liquidity bubble in a few short years, trading exclusively with its vassal master: the People's Republic of China.


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Thu, 11/12/2009 - 20:31 | 129178 FLETCH
FLETCH's picture


i can't believe buffet and gates were telling b-schoolers the opposite today...

Thu, 11/12/2009 - 21:01 | 129212 anynonmous
anynonmous's picture

F. you forgot to include the sarcasm icon with your post

Fri, 11/13/2009 - 00:44 | 129387 Sam Clemons
Sam Clemons's picture

Gotta get someone to pick up the massive amounts of shares they want to unload at prevailing prices.

Thu, 11/12/2009 - 20:37 | 129185 faustian bargain
faustian bargain's picture

Hope I'm not too late to start learning Mandarin. :(

Thu, 11/12/2009 - 21:06 | 129224 chet
chet's picture

They all speak English.

Thu, 11/12/2009 - 21:36 | 129250 faustian bargain
faustian bargain's picture

for now.

Thu, 11/12/2009 - 20:38 | 129187 Apocalypse Now
Apocalypse Now's picture

That's heresy, you can't say the D word - only the I word.

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.” - Joseph Goebbels, father of state propaganda

Thu, 11/12/2009 - 21:06 | 129225 waterdog
waterdog's picture


Thu, 11/12/2009 - 21:08 | 129229 Anonymous
Anonymous's picture

Thanks Kurtz.

How do I know Goebbels wasn't lying when he said that ;-)

I watched an economy crawl along the edge of a straight razor...

Thu, 11/12/2009 - 22:04 | 129275 Gordon_Gekko
Gordon_Gekko's picture

The lie in this case is deflation. The fact that a majority of people believe we are in "deflation" (what they really mean is dollar-deflation) is just a testament to success of the Ministry of Propaganda. It doesn't mean we have "deflation"; in fact, I think it bolsters the case for inflation even further as the majority is usually wrong.

Thu, 11/12/2009 - 23:26 | 129346 Spitzer
Spitzer's picture

Thats right, monetary deflation is credit contraction. 0% interest rates, credit contraction my ass.

Fri, 11/13/2009 - 01:50 | 129421 Apocalypse Now
Apocalypse Now's picture


Recall my comments in the fine art of foreplay regarding patience in our approach towards gold, and that we shouldn't "rush to the clit*ris" like it's our first time.  I'm reminded of the story of the old bull and the young bull looking down at the field of cows, the young bull says let's run down and f*ck a cow - the old bull says let's walk down and f*ck them all (sorry ladies for the analogy).  We are both strong gold bulls, and I'm keeping a load of cash in case the dollar strengthens (very short term) to shake out weaker speculators in gold - in that case I will be buying dips and will not prematurely shoot my entire load.

There is no question that the propaganda machine has been terrorizing 401K pensioners with the prospects of hyper-inflation, just ask yourself which one banks want & need - now who owns the media and what have they been saying (peak oil, any excuse to keep prices higher so they can pocket spreads between supply/demand curve - see GS global oil scam article - and their corrupt exchange cost plus price). 

Right now deflation is the contrarian view point but all of the facts state WE ARE IN DEFLATION NOW and the statistics are too numerous to bother repeating as you probably know them.  Bonds, CPI, PPI, Unemployment, Wages and interest rates are pointing to deflation and a depression. In fact, all you have to look at are wages & credit.

In fact the proper historical perspective is that we had massive inflation that started to deflate two years ago with housing prices and equities in a credit collapse.  Clearly we know they are working to reflate the bubble but there is a disconnect between capital markets and the economy as you know, and over a longer time period this could cause inflation again. Read between the lines on the FOMC minutes, no chance of inflation near term although they want it and the banks need it.  You know a housing bubble is forming when housing prices increase at a higher rate than wage growth, it's that simple, and it's not sustainable.

We will have GDII, or Japan's lost decade, and hopefully not Weimar.  If you are of the opinion that we will have a depression and hyper-inflation from printing I could appreciate that might happen in time with a currency collapse of confidence.  In fact, the information on state and federal tax receipts indicate a cash flow problem and the behavior of representatives and government officials may also indicate we are in the midst of a collapse.

My belief is a balanced market requires trying to balance 50% of people into deflation and 50% of people into the inflation camp so that trading continues (liquidity) and assets don't go to zero while gold goes to $1million per ounce (smile).

Not sure if you saw the recent Nine Points interview with Damon Vickers on CNBC last night (father worked as a trader for GS) saying the USD will collapse and usher in the new world currency and the world government.  But a purposeful controlled demolition predicated by dismantling the US industry and exporting it overseas is just crazy conspiracy talk, isn't it?  It could be possible he is a tool and is working toward a collapse by scaring the populace - but it could also be possible that we have reached the point of no return and he is aware of the plan for the world:

"We are grateful to The Washington Post, The New York Times, Time Magazine, and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. It would have been impossible for us to develop our plan for the world if we had been subject to the lights of publicity during those years. But the world is now more sophisticated and prepared towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries."David Rockefeller


His brother, senator Jay Rockefeller stated the internet should not have been invented!

There is a philosophical war on between the collective and the individual, between freedom and tyranny, between truth and lies, between decentralized and centralized planning, between the life liberty & the pursuit of happiness and death bondage and the pursuit of control, between individual property rights and tyranny of a concentrated group of collusive elites working together to destroy your rights and concentrate their power so they can rule without any resistance.  The conspiracy theorists were right all along.

You are right we will have hyper-inflation judging by the lack of discipline in Washington, the only question is timing and how long deflation lasts.  We're both gold bulls, let's walk down to the physical and gold shares.


Fri, 11/13/2009 - 10:36 | 129626 lookma
lookma's picture

Right now deflation is the contrarian view point but all of the facts state WE ARE IN DEFLATION NOW and the statistics are too numerous to bother repeating as you probably know them.  Bonds, CPI, PPI, Unemployment, Wages and interest rates are pointing to deflation and a depression. In fact, all you have to look at are wages & credit.

What about the most important statistics of them all, the dollar?  Inflation and deflation are not just phenomena of increasing and decreasing credit.   The linear thought process of inflation through credit and deflation via contracting credit is not shared by Mr. Bernanke and many others.

Bernanke believes you can also create inflation through currency depreciation (especially as a net importer/debtor), and that's exactly what they are attempting to do.  Many would argue they have been relatively successful, as they are depreciating the dollar against commodities (see oil and gold) and the debt level.

Of course the Fed funds rate will stay at zero and this is what people expect - the FED cares about its member banks, and they are in trouble.  The banks face the unwinding of the housing bubble.  This looming asset price deflation does not equal deflation.  Bernanke isn't focused on inflation v deflation, he cares about bank health, and people know this, which is why they expect him to keep printing.

Ben is not pursuing the same policies as Japan.  He is trying to depreciate the currency with the expectation he can retain downside control and it won't get out of hand (hyperinflation) as the currency collapses.

Fri, 11/13/2009 - 10:45 | 129636 Blunt Instrument
Blunt Instrument's picture


Remember, according to Timmy, Benny, and Barry it's a liquidity problem.  Not enough dollars to chase assets results in assets becoming devauled.  Devalued assets used to create phenomenally complex and pervasive derivative contracts means we cannot let those asset values fall or the entire house of cards will fall.  They have no choice but to keep printing.  The falling dollar also helps them as we can increase exports, increase domestic labor demand, increase inflation.  Consumers pay back debts with devalued dollars. They can then increase domestic spending.  We can tax them more - we'll need it to pay the interest on our debt to the rest of the world. 

Not a pretty picture.  But, I don't see how they alter this course now that they have embarked on it.

Fri, 11/13/2009 - 16:53 | 130086 Apocalypse Now
Apocalypse Now's picture

Ma, look, I understand the predicament and Mr. Bernanke's desire to play chicken with the currency and provide liquidity to member banks.  Remember that we have a debt cap so there are limits to the amount the fed can print - this is an important point in defense of the middle class since the fed would gladly sacrifice the buying power of the middle class for its member banks. 

If you look at the trillions in derivatives, we can understand the scale of the problem and how much printing would need to take place - I also know they are back door "printing" by having banks stabilize asset prices (having the banks buy equities and MBS) by pumping and dumping into the fed (buyer of last resort) and this can be used as collateral to provide more liquidity (and the fed can't be audited, so it is a black hole). They may have learned that housing price performance is roughly correlated to the stock market performance, another reason for ppt activity along with consumer confidence.

There is no money velocity right now, and banks are hoarding money for the rate resets and CRE implosion coming - that means they think houses will be worth less in the near future and that income on loans to americans that will have less wages is riskier than keeping it at the fed earning interest.

We need to address these issues the correct way, to state a short term, medium term, and long term outlook - we are still in deflation, we know it and that is why there will be a second quantitative easing program while the President gives lip service to the concept of cutting government budget deficits (for treasury sales). 

More taxes will kill the consumer, and the combination of more printing and less tax revenues will eventually result in hyper-inflation as the spread between them accelerates. I hope they succeed in their mandate of stabilizing prices and full employment - but they can't do that alone, it will take a coordinated plan including government plans to encourage/incentify entrepreneurs and workers to work harder - not so that they can pay taxes but so that they can better their quality of life.  In short, the oligarchs will have to share opportunity, although it would appear they would prefer to bankrupt us all.

The government should not steal our hard earned money we labored for to give it to bailout the bankers poor investments - that is poor capital allocation.  The bird of opportunity alights on the open hand - not on an iron fist.

Check out Antal Fekete’s deflationist argument concerning the marginal productivity of debt.

Fri, 11/13/2009 - 02:31 | 129434 TumblingDice
TumblingDice's picture

Right now, they are trying as all hell to get inflation. It is hard (deflation otoh, is easy to bring about if they wanted) to do but it is making them money. Whenever inflation becomes easy, the collusion for inflation will halt and they will sacrifice one of their own once again and get an even bigger bailout. There are a bunch of creative and hard ways to buy, to stretch out leverage, but selling is easy and straightforward.

Fri, 11/13/2009 - 00:56 | 129398 Problem Is
Problem Is's picture

Edward Bernays and Woodrow Wilson are the fathers of state propaganda...

Actually, Goebbels and Hitler raved about and learned their propaganda skills from Walter Lippman and Edward Bernays.

Hitler was amazed at the effective use of state propaganda to manufacture consent for US involvement in WW1 through Wilson's The Committee on Public Information, a National apparatus equivalent in scope and nature to Goebbels' Ministry.

The fascist Wilson was a proponent of the Sedition Act, criminalizing dissent, approved a DOJ domestic spy and snitch program to intimidate any anti war sentiment with both vigilante attack and DOJ criminal charges, essentially a US Brown Shirt force, pre Cointelpro US gestapo reaction to dissent.

Hitler and Goebbels learned from Bernays and the two main US corporate propaganda organs, the US Chamber of Commerce and the National Association of Manufacturers. US corporate power and elite wealth spent hundreds of billions of dollars in the 20th century in well documented forms of propaganda.

The US public are the most propagandized people on the planet by sheer dollar volume and saturation. It shows in the US public's inability to think or analyze effectively.

Fri, 11/13/2009 - 06:49 | 129502 Cognitive Dissonance
Cognitive Dissonance's picture

Personally I let my TV think for me. Much less confusing and those 30 and 60 second programs are great.



Fri, 11/13/2009 - 18:44 | 130222 Problem Is
Problem Is's picture

Yeah my brother-in-law the dickhead contractor gets all of his thinking from those 30 to 15 second programs and CNBC which is just a bunch of 30 to 15 second programs glued together into a stream of consciousness... usually by silicon or obnoxious used car salesman.

It was not the housing collapse that made him a dickhead contractor... he was one in the bubble days as well...

Thanks CNBC for making my brother-in-law a know it all dickhead contractor.

Fri, 11/13/2009 - 02:24 | 129433 TumblingDice
TumblingDice's picture

I remember learning in my macro-econ class in college that inflation=expected inflation. I thought it was the dumbest thing ever at the time but now I am beginning to understand.

Thu, 11/12/2009 - 20:42 | 129191 waterdog
waterdog's picture

"the Fed will promptly resume destroying not only the US middle class, but the entire system of global trade built through many years of globalization. Look for America to end up in an insulated liquidity bubble in a few short years, trading exclusively with its vassal master: the People's Republic of China."

Mr. Durden, with all do respect to you, I wish you would stop placing these bits of wisdom at the end of your post. Your clever use of descriptives is one of the attributes that makes this site a joy to read. However, this type of color could be a root cause of the type of comments that Marla is trying to prevent.

Thu, 11/12/2009 - 21:56 | 129267 Cheeky Bastard
Cheeky Bastard's picture

dang !!!

did you come with that all by yourself or did you use the " I make no sense and i have no idea what he is talking about, because I'm not getting this shit; AT ALL " booklet.

Its easy to criticize, try to contribute. Write a piece my good man, and submit it to ZH and IF it gets published your criticism will have some merit. Until then .... Well ....

Thu, 11/12/2009 - 22:34 | 129300 waterdog
waterdog's picture

Ok, Ok Cheeky, calm down man, it is not about the issue, it is about color. I just asked to tone it down when suggeting that Americans will be eating Chinese sausage roll every morning,( I would be more graphic but that sting of the whip thing scares me).That is all. I can cut and paste also. I know where to get graphs. I can sure as heck write a high school paper on what I have read. I did say with all due respect. I still do not understand what made you flip out over this. Of all the junk I have posted here, this pushed you over the edge?

Thu, 11/12/2009 - 22:37 | 129307 Cheeky Bastard
Cheeky Bastard's picture

Dude, calm down ... it did not push me over the edge. I'm just saying that, although the tone might be a bit over the top, the line itself is not false. And this I just asked to tone it down when suggesting that Americans will be eating Chinese sausage role every morning,( I would be more graphic but that sting of the whip thing scares me) is your reality; if you don't believe me pull up a foreign reserve holdings data for the $ or just visit you local Wal-Mart. Or better yet ask yourself WHY is the unemployment 17.5%. Hitn, not because of THIS recession is not .... I like your post, and i know what you were saying with your comment, i just want you to know that it has some truth to it. And Im not gonna defend Durden on I can cut and paste also. I know where to get graphs. I can sure as heck write a high school paper on what I have read. <--- this

He can do that all by himself, but if you are able to do what you say you are, how come i don't see nothing written by you. As I said earlier; criticism without merit ....

Also you CAN be  A LOT more graphic, the sting of the whip will not be used. Oh ... look at that ... it looks like you can not write about what you read before (meaning marla post).......

Thu, 11/12/2009 - 22:59 | 129327 waterdog
waterdog's picture

Ok. First, I was not talking about Mr. Durden's writing being at the high school level. That comment was directed at what it takes to post content here. And you know exactly what I mean. Not that all people who post here are working on a high school level.

I can be a lot more graphic but it will not get my point across any clearer.

95% of the time I post here I am talking to myself. It is called therapy. It works. The only reason why I responded to your comment is because it was you. I did not mean to suggest that the writer of the post was an incompetent fool. I only wished to remind him that some of us who read his post are.

Fri, 11/13/2009 - 05:49 | 129493 Anonymous
Anonymous's picture


Headline: "Cheeky whips waterdog into meek submission".

Film at 11. Attaboy Mr. Bastard. Dr. Horace Manure

Wed, 12/02/2009 - 19:44 | 149865 Anonymous
Anonymous's picture

Perhaps you should stop worrying about the color and start worrying about the truth.

Fri, 11/13/2009 - 01:09 | 129403 Problem Is
Problem Is's picture

"However, this type of color could be a root cause of the type of comments that Marla is trying to prevent."

Waterdog that is exactly why I have invented the all purpose, generic, over the counter disclaimer to place at the end of any post where I have used the terms:


"idiot"  or

 "Timmay's Aunt Lloyd"...

I protect myself by stating the disclaimer:

"I hope none of the above violates any of Marla's new rules and etiquette crackdown..."

I fear the wrath of Ms. Singer...

Thu, 11/12/2009 - 20:46 | 129194 G. Marx
G. Marx's picture


The halt and then decline of the globalism we've seen over the past two decades, will reduce the need for a global reserve currency and further undermine any perceived or practical need for other nations having dollar reserves. We will be sliding back to regional economic interaction until this crisis ends and some semblance of reason and market dynamics enters into national and global monetary policies.

Fri, 11/13/2009 - 07:00 | 129504 Anonymous
Anonymous's picture

But by the time things would have been back to "some semblance of reason", we're going to have accrued another pile of world-altering new technologies anyways.

Things will never go back to the way there were, aside from the whole corruption and idiocy part.

Thu, 11/12/2009 - 21:02 | 129217 Anonymous
Anonymous's picture

Don't think the Fed can launch QE 2 as you propose. To do so means the price of oil and other imported commodities would go through the roof as the dollar collapsed. The populace would not stand for $3.50 per gallon gas nor $500 one way plane tickets regardless of what the Fed wants to do. I think we are at the end of the line with the dollar's decline and thus, with the Fed's games.

Thu, 11/12/2009 - 21:38 | 129252 Masked Man
Masked Man's picture

The public didn't storm the Bastille when gas went over $4 a gallon last year. Nor did the truckers descend on Washington like they did in the 90s when diesel went over $2 a gallon.

Thu, 11/12/2009 - 23:15 | 129340 deadhead
deadhead's picture

the truckers did protest on diesel and there was an enormous amount of media coverage on it as well as very pissed off Americans on 4 dollar gas. 

there isn't a congress critter alive that wants to see gas at 4 bucks cuz it is a death knell for the party in charge.

one of the reactions as we know to the fed's policy is higher commodities, mainly oil, and it is completely verboten in the usa at this particular time to have gas hit 4 bucks...if it does, the shit hits the fan and the fed will not be allowed to accomodate that.

Fri, 11/13/2009 - 02:41 | 129444 Assetman
Assetman's picture

Deadhead is exactly right about his history-- truckers did protest diesel prices when they spiked.  The crossover of $4 gasoline resulted in a more muted outcry from consumers-- but make no mistake-- the rise shifted consumption habits and contributed to the eocnomic downturn in the U.S.

One thing missing from the "cause and effect" from $4 gas prices is the context of the employment situation.  At last year's $4 gas, unemployment was still in the single digits.  Today U-6 is at 17.5% and still rising.   I think it would be even more reasonable to believe that the general public will be reacting much more strongly to $4 gas this time around-- when they can barely put food on the table with an unemployment check as the bread winner.

Fri, 11/13/2009 - 08:43 | 129534 gatopeich
gatopeich's picture

$4/gallon, bet your <Marla forbids> you'll see it.

In Spain we currently pay 1.2 EUR/litre ~ $6.8/gal. Euro average is probably higher. A lot of it is tax (what an idea!). Before joining the EU, we thought Euro gas was too expensive for us, and (sheeply) believed we would stay apart on that. Big laugh! Inflation here has been so strong since then that government regularly changes PCI formula to keep the official numbers single digits, while real prices doubled in a few years. Not to speak of our housing bubble, still denied by many.

In 2005, when $1 was 1.5€, I was an expatriate in Mass (for a fraction of what americans coworkers made). I found everything there cheaper than in Madrid, while the people apparently made double the money. At that time I thought it must be because the US was kinda looting around the world (Iraq, Af, etc.)... Well, that's enough of my life for today.

For how long do you think the US people will have gas at half of the price in Europe?

Wellcome to Banana Republic! (We already there!)

Fri, 11/13/2009 - 11:32 | 129690 Anonymous
Anonymous's picture

I understand why you think America is spoiled with cheap gas and should join the ranks of all the rest of the worls and start paying high prices.
Yet for those of us who have lived in US and a bit in Europe we know that the price of gas is not translatable.
Firstofall you will never find Gas in Europe that is less then what was it 98 octans. Mind you we can buy gas here that is what 84 octans per gallon.

Plus Americans travel about 2.5 times more miles per day more then eauropeans just becasue US has a completly different set up.

Thu, 11/12/2009 - 22:13 | 129282 jm
jm's picture

Can't do it now, but they can after the next demand collapse... guessing oil will drop to $50 bl.  High taxes will keep a lid on discretionary demand.

Following that, the supply collapse is going to make oil and food go through the roof anyway.

They will have nothing to lose then.

Thu, 11/12/2009 - 21:08 | 129227 anynonmous
anynonmous's picture


Which is why Zero Hedge is willing to wager that not only will the agency/MBS program not expire in March as it is supposed to, but that a parallel QE process will likely begin very shortly.


Even even with long-shot odds I would not take that wager - but the question I have is how will equities respond.  In terms of the inverse relationship between equities and the DXY- will it decouple, moreover will it begin to relate directly as you seem to suggest vis a vis the seize up of global trade?

Fri, 11/13/2009 - 01:34 | 129415 msorense
msorense's picture

Good point - I've been seeking other opinions on this one for some time.  In my opinion, a sudden dollar collapse would cause a huge panic and everyone would want to flee from US paper.  That means the currency, bonds, and stocks.  Just think for a minute what would happen if the prices of everything were to double but your income would stay the same.  There would be mass chaos in this country.  With additional QE and money printing, hyperinflation would be virtually assured.  Therefore, I can't see it being good for the stock market. 

Thu, 11/12/2009 - 21:11 | 129230 D.O.D.
D.O.D.'s picture

Well there's another side you're not looking at Tyler.  If 2012 is real (consider the possibility that the Higgs Boson and Hawkings' Radiation are the same thing), it won't matter. 

The only thing that matters between now and then is keeping the people safely dumbfounded, and Big Ben Bernankes ineptitude is the perfect vehicle.

Fri, 11/13/2009 - 00:49 | 129393 ElvisDog
ElvisDog's picture

You were kidding right? Just in case you weren't, the Mayans used a circular calendar that started from an arbitrary date several thousand years before the peak of their civilization. 2012 means nothing. It's just an odometer rollover. If they had just added one more digit to their date count, we would be talking about the end of the world in 50,000 years or whatever.

Fri, 11/13/2009 - 08:23 | 129526 Anonymous
Anonymous's picture

it is certainly not an "arbitrary date." the maya were able to calculate the date when the earth and sun align with the galactic center, an eclipse of the milky way, if you will. look it up, its quite fascinating.

Thu, 11/12/2009 - 21:14 | 129234 Bubby BankenStein
Bubby BankenStein's picture

The Globalization experiment will be a fail.  Twenty years from now the USA will be the dominant industrial economy.  What happens from now until then can only be left to the imagination. 

Thu, 11/12/2009 - 21:47 | 129256 Masked Man
Masked Man's picture

You are joking, right? We outsourced all our manufacturing and manufacturing expertise over the last few decades. Tool and die makers and manufacturing engineers are extinct in the U.S. How could we possibly rebuild our manufacturing base?

Thu, 11/12/2009 - 22:38 | 129309 Orly
Orly's picture

No, Bubby is right.

You can take all the little widget jobs off the former factory floors but those aren't the "industrial" jobs of the future.  Those jobs are going to be in industries that we can't even imagine today.  (I mean, if we could, we would all be at the drawing board right now creating our billion-dollar companies...)  The jobs "lost" to China and India are jobs that the US can shed as passe when looking to the future of innovation.  I really wouldn't believe anyone who says that the US is not the innovator of the future.  We always have been the engine fo the future and we always will be.

By the by, did you see the videos today on ZeroHedge of the massive Chinese shopping mall and the lite article on a town in Inner Mongolia that the Chinese built just to satisfy their GDP numbers?  Fascinating.

In both cases, the town and the shopping mall were virtually deserted.  There was another video on YouTube just a few weeks ago that showed how a factory town that used to boom with people working 24/7, manufacturing everything from designer shoes to tires, was, as well, virtually deserted.  There were rows and rows of jail-style cots for the poor migrant workers to sleep on but now, they were all empty.

The myth of the Chinese taking over has certainly perpetuated itself to its zenith.  The truth about it will soon be drawn out in the wash, so save yourself the Chinese lessons.  It just ain't gonna happen.

Therein is my argument with the conclusion of the article.  The Boyz know they have absolutely no reason to fear the Chinese...but they also still have the annoying problem of all that idle money sitting in banks, not moving, not creating any credit velocity whatsoever.  If it ain't moving, it is going to sink- end of story.

My thinking on this is that it is by design.  (Okay, I am a conspiracy theorist...)  As it stands now, there will be massive deflation in the US of A and there is nothing anyone can really do about it.  There is no possible way, as Bubby says, that the Fed is going to keep trying to reinflate this massive balloon through dumping money.  Certainly, they must realise that, first, it won't work (because the banks still aren't going to lend...), and, second, if it did, the long-term debt would be infathomable even to this hardy cabal of puppet-master elitist oligarchs.

Therefore we see: banks still have not injected money into the system, as they are not lending; the smart money is riding heavily in favor of deflation; and, in general, nothing I see makes a lick of economic sense any more.

Strange things are afoot at the Circle K, that much is true.  But the key and the answers are not held by the Chinaman behind the counter.

He just wants you the hell out of his store.

Thu, 11/12/2009 - 23:26 | 129345 JamesBrrando
JamesBrrando's picture

whew. That lies right on point with my own hypothesis and im glad smart money agrees with me.


Thu, 11/12/2009 - 23:30 | 129349 Spitzer
Spitzer's picture

hahaha, have you ever dealt with a labour union ? No.

Fri, 11/13/2009 - 08:05 | 129519 Winisk
Winisk's picture

Globalization is a failure.  Not that clear.  But economies will swing back toward local to some degree especially as protectionist attitudes flourish in a desperate economy.  It's unlikely that the US will be the dominant industrial economy however.  That's wishful thinking.  China, India, and the rest will not slip back into non-manufacturing economies now that they have the capacity to do so.  This may be a process of leveling out.   

Thu, 11/12/2009 - 21:17 | 129237 P Kennedy
P Kennedy's picture

Hey TD, given the dilution of QE2, why would China or ANY other non-dollar buyer finance our deficits? The risk is a buyers' strike, with interest rates simply going vertical in the good 'ol USofA


Thu, 11/12/2009 - 21:17 | 129238 EconomicDisconnect
EconomicDisconnect's picture

I keep hearing how so many other nations are so much worse off than the US, but I try to think about the scale of what the FED/Treasury is trying to do and I am reminded of the classic scene form the film "Jaws":

"I need something in the picture to give it some scale!"

"Scale, my A##!!"



Thu, 11/12/2009 - 21:23 | 129243 Anonymous
Anonymous's picture

For Marla, hug a banker... Can't prosecute em, can't smash em in the head with a bottle.

Thu, 11/12/2009 - 23:59 | 129361 Anonymous
Anonymous's picture

and what would the outcome have been if blacks
had stayed off the streets like good darkies in
the 1960s and 1970s? hug uncle cracker and he might
let you have another loaf of white bread...

Thu, 11/12/2009 - 21:50 | 129261 ghostfaceinvestah
ghostfaceinvestah's picture

"Which is why Zero Hedge is willing to wager that not only will the agency/MBS program not expire in March as it is supposed to..."

That is pretty much a given.

Bernanke may stop for a few weeks, but once spreads on Fannie/Freddie MBS explode, he will have no choice but to step back in.  He has basically killed any natural market for that product.

Thu, 11/12/2009 - 21:55 | 129265 Anonymous
Anonymous's picture

QE 2. Make no mistake about it. They will stop at nothing. These creatures at the Fed are reared at birth.
From the ashes we will rebuild.

Thu, 11/12/2009 - 22:02 | 129273 Fritz
Fritz's picture

They may suck at QE, but they have mastered the art of gunning the S&P.

(p.s. Goldman is a Bucket Shop)

Thu, 11/12/2009 - 22:11 | 129280 Anonymous
Anonymous's picture

Hey, Cheeky Bastard, what are you doing at that genteel Berkeley country club the Delong blog where all reality is neo-Keynesian?

Thu, 11/12/2009 - 22:17 | 129285 Anonymous
Anonymous's picture

Can they really be so educated and yet so stupid as to continue to allow all that's being suggested to happen? If so aaiieee...


Thu, 11/12/2009 - 22:24 | 129297 ghostfaceinvestah
ghostfaceinvestah's picture

on this topic, spread the word...i have done my part by donating to some of these candidates.

Thu, 11/12/2009 - 22:26 | 129299 phaesed
phaesed's picture



The truth is a beautiful thing to read. Thank you.

Nothing like a nice 1909, 1919, 1979, 1987 style massacre to get the pump primed.

Thu, 11/12/2009 - 22:28 | 129302 Bonesetter Brown
Bonesetter Brown's picture

There will probably be a positive print on GDP in Q4.  We've got the extension of the home buyer credit to help the housing market bounce along at its current rate.

What is the cover story for QE2.0?  Does the FED just come out and announce another $1T of MBS purchases during one of its regular meetings in Q1?

Consider, the FED's actions under QE1.0 have been qualitative not quantitative.  The monetary base has stayed fairly constant after exploding in Oct 08.  The FED has just been swapping "other" assets for MBS and Treasuries since QE1.0 started.  When QE1.0 has run its course, it is quite possible the monetary base is still about where it is today.  QE2.0 will deliver a 1-for-1 increase in the monetary base.  The action in gold anticipates this.

I don't see the political cover for either stimulus 2.0 or QE2.0 until there is some sort of event (double dip, market crash, huge spike in yields). 


Fri, 11/13/2009 - 11:59 | 129463 Assetman
Assetman's picture

I agree with your line of reasoning here.

The Fed could continue to pursue QE 2.0 concurrent with QE 1.0-- but they don't need to immediately.  In fact they risk unpredicatable currency devaluation and a panicked capital flight if they go about hyper-easing unabated.

There's really little need to risk a currency crisis here.  All the Fed really needs to do create the conditions for the next safety trade-- while risk spreads will widen, Treasury rates are likely to remain very low-- allowing the Treasury a great opportunity to finance the growing deficit as far out on the curve as possible.

Prices of risk assets may contract significantly-- but the ensuing panic will provide plenty of political cover to launch QE 2.0, if not Stimulus 2.0.  But the migration to safety assets and a percieved underlying support for the dollar will provide plenty of natural buyers of Treasuries-- both foreign and domestic.

That being said, Uncle Ben is capable of misreading the whole situation and could risk a real capital flight if he isn't careful.

Fri, 11/13/2009 - 14:25 | 129934 AR
AR's picture

Assetman, you are very correct here. The issue and unknown is... that Bernanke, Geithner, Summers, and this Administration, are rabid, out-of-control dogs. We here inside our firm, have absolutley no confidence they known what to do, or worse, what harm they are doing by their actions. Bluntly stated, we believe they are absolute idiots flinging half-baked monetarty and fiscal ideas around like it's some science project. Whereby, if one experiement fails, they just try another one, all in hopes one will eventually be successful, and poof, the whole world is a happy, thriving place, where credit flows out everyone's ass again. This experiment is becoming dangerous and may already be at a point of no return for the U.S. economy. Socialism may be closer than any of us think.

Fri, 11/13/2009 - 19:29 | 130279 snorkeler
snorkeler's picture

AR, and the news here is what again?

Thu, 11/12/2009 - 22:29 | 129303 Bonesetter Brown
Bonesetter Brown's picture

<double post>

Thu, 11/12/2009 - 22:30 | 129304 Bonesetter Brown
Bonesetter Brown's picture

<ugh, triple post>

Thu, 11/12/2009 - 22:46 | 129315 THE DORK OF CORK
THE DORK OF CORK's picture

A truely amazing dissertation but you failed to factor into your model the possibility of global thermonuclear warfare before we get to audit the fed........

Thu, 11/12/2009 - 22:51 | 129321 hidingfromhelis
hidingfromhelis's picture

I don't see the political cover for either stimulus 2.0 or QE2.0 until there is some sort of event (double dip, market crash, huge spike in yields).


Ask, and you shall receive.

Thu, 11/12/2009 - 23:01 | 129328 sawyer
sawyer's picture

"The end result of all these actions, of course, is that the value of the dollar is about to plummet: when Bernanke announces that not only will he not end QE but that he will launch another version of the program, expect the dollar to take off on its one way path to $2 = €1."


What makes you believe EU, GB won't follow with their own QE? GB is already in its QE#2 And if they don't there is possibility that a Spain, or Greece will leave the EU in order to inflate themselves out of their enormous debts. 

You are only looking at one side of the coin and policies of the US Fed without analysing any policies by the EU or Japan.

EU GDP to be released in the AM.

Sawyer (Jim LaFleur)


Thu, 11/12/2009 - 23:14 | 129338 Tyler Durden
Tyler Durden's picture

We have discussed the race to the bottom extensively in previous posts. While the UK is certainly gunning for extra QE, the dynamic duo of Merkel and Trichet refuses to acknowledge that the Eurozone has bad debt and is willing to inflate the euro to the stratosphere as US-denom equity markets lift up the euromarket boats: the benefit - double impact of capital appreciation and overvaluation vs. dollar, in essence offsetting the euro economic "losses." Which works until it doesn't. Ironically, why the DAX should follow the S&P on completely decoupled stock valuation principles (weak dollar in the US, osmosis in Europe?) is stupefying. Keep a track of Nic Lenoir's discussions of the S&P as contrasted to the DAX.

Fri, 11/13/2009 - 10:11 | 129604 Green Sharts
Green Sharts's picture

With regard to the DAX, did you see Wednesday's FT full page piece on German industry e("Keeping the lights on")?  They are in a severe case of denial.  They are not only not laying off people, they're bragging about continuing to hire engineers and maintaining their R&D spending.  They are pretending this is a normal cyclical slump and are waiting for their export business to bounce back, even as the Euro appreciates versus the dollar, yen and yuan.

From the article:

<This year Germany's engineering and electronics industry is heading towards an aggregate loss for the first time since the second world war, according to Gesamtmetall, the industry publication.  But in spite of an expected 20 per cent drop in production compared with 2008, the workforce is expected to fall by only 2 per cent.">

<This job stability comes mainly as a result of a state-sponsored scheme dubbed Kurzarbeit (short-time working) that encompasses one-quarter of Germany's engineering workforce.  If an employer wants to cut working hours to save money, the state covers up to two-thirds of the wages that staff would otherwise lose.>

<Leif Ostling, head of Scania, the Swedish truckmaker, does not mince his words when talking about Kurzarbeit:  "I do not think Germany has found the formula to avoid restructuring.  We have tied out similar measures in the 70s and 80s but found out that it just postpones the necessary job cuts.">

<Engineering groups "are clearly betting on a V-shaped recovery and there is a substantial risk that this is not playing out", Mr. Ritschl says.  "In order for this German betting scheme to work out we will have to see an increase in production that would bring the companies back to almost full capacity in the next half year.  This is highly unlikely.">

Thu, 11/12/2009 - 23:29 | 129348 Argos
Argos's picture

Things are going to end badly.  My question is, will the military fire live rounds on American protesters?  I don't think so.  Will the National Guard? 

Fri, 11/13/2009 - 11:23 | 129678 exi1ed0ne
exi1ed0ne's picture

At that point they will no longer be American protesters.  They will be seen as dissidents, terrorists, disloyal citizens, criminals, etc.  Those with the guns will no longer associate protesters with their peer group.  Some may be squeemish, but history tells us national kinship is a poor deterrent.

Thu, 11/12/2009 - 23:37 | 129351 Anonymous
Anonymous's picture

You can extrapolate that based on today's charts, but the Asian countries other than China are beside themselves over the sliding dollar.

Thu, 11/12/2009 - 23:39 | 129353 Spitzer
Spitzer's picture

Take Bannana Ben at his word, monetary deflation as in credit contraction is not in the cards.

Thu, 11/12/2009 - 23:48 | 129357 Anonymous
Anonymous's picture

We are going to end up selling Alaska to China for like 6 trillion and calling it even.

Fri, 11/13/2009 - 08:01 | 129518 Ned Zeppelin
Ned Zeppelin's picture

Make sure we throw in Palin to seal the deal.

Fri, 11/13/2009 - 19:32 | 130283 snorkeler
snorkeler's picture

Well then they get it for $5 trillion. Isn't there a better way?

Fri, 11/13/2009 - 00:17 | 129374 digalert
digalert's picture

Good report, rather than doing FED probability analysis. Why don't you just ask bubble Ben? never mind

Fri, 11/13/2009 - 00:46 | 129391 delacroix
delacroix's picture

what happened to raising the debt ceiling, before they go on another spending spree

Fri, 11/13/2009 - 01:18 | 129408 Anonymous
Anonymous's picture

Have y'all been following the M1 money multiplier thread over at Denninger's (monetary policy subforum, thread begins "M1 money multiplier)?

The multiplier has been falling and now is .831.

Fri, 11/13/2009 - 19:34 | 130285 snorkeler
snorkeler's picture

It should fall some more before it starts back up.  Printing continues while lending continues to retreat.

Fri, 11/13/2009 - 01:45 | 129423 msorense
msorense's picture

I'm kinda glad that Mr Durden is making such wagers.  Maybe then the dollar will rally and this market will finally crumble. 

Fri, 11/13/2009 - 02:37 | 129438 Mark Beck
Mark Beck's picture

TD, I am not convinced that Ben B. will launch QE2, his actions, like you indicated, are now the primary focus for pricing dollar denominated investment (Bonds) and dilution (existing liabilities).

Ben is not a happy camper, like it or not, he is now part of international politics. Ultra loose is out, or he will be bitch slapped by the invisible hand.

Ben will do nothing until the President gets his marching orders from Japan and China. The Presidents last card, is to give assurance to pull out of Iraq or Afghanistan. Something to indicate fiscal responsibility, you know, give these Bond holders a warm fuzzy.

Ben will have his hands full plugging the RMBS/CMBS holes, he must prop up the financial institutions first, the dollar is secondary.

I would really like to be at the meeting when the Chinese representative asks Obama, "After all of the spending why do you continue to lose jobs at such an alarming rate?", and without missing a beat, either Geithner or Summers (I am not sure who will be on the trip), will say, "Oh this is a jobless recovery", the Chinese will immediately breakout in laughter so strong that it will bring tears to their eyes. The biggest mistake would be to try and BS these guys again like Geithner did on his last trip.

Fri, 11/13/2009 - 04:00 | 129473 Anonymous
Anonymous's picture

2$ for 1€...

Looks like I already know my holiday destination this summer! :)

I think that will be a cheap trip for us Europeans :)

Fri, 11/13/2009 - 04:07 | 129476 Tic tock
Tic tock's picture

Geitner will answer: 'Because I am dressed as a lady under these clothes you horny big dick' -no, seriously.. 'Because this is the first step in a much bigger problem, the loan exposure of the entire Banking sector is far larger than anyone in their right mind can imagine. Firstly we must create the perception that the Banks are solvent enterprises or our, and by extension your, monetary system will collapse. Once we are beyond the CRE storm the financial system can be rebuilt and Credit made to flow to our worker comrades'

At which the Chinese foreign minister will ask 'and is it working, this illusion?'

And someone monkey/visionary policy-maker will return..'we're about to turn ESPN free-to-view, we are fairly confident of success'




Fri, 11/13/2009 - 07:40 | 129510 Anonymous
Anonymous's picture

Today, at 0538 local time, I have officially given up on trying to predict what the hell the Fed/Treasury/etc. are going to do, are trying to do, or will actually accomplish.

Shit just makes no sense; too many angles for too many people to benefit from all manner of things, and at the end of the day no one knows what is really going to happen regardless of what they WANT to happen.

I guess I'll just go back to packing away beans and loading more ammo, in between working the day job and gawking at the financial train wreck here on ZH.

Fri, 11/13/2009 - 07:58 | 129517 Ned Zeppelin
Ned Zeppelin's picture

As for policy, what part of "we will use all available tools" is difficult to understand? The link between the dollar's track lower and the S&P's rise, the latter basically an inverse ETF for trading the dollar, was something I was blind to for months, as were many here I think, and have realized the fundamentals are irrelevant.   QE is the official policy for as far as the eye can see, in an "all-out" attempt to fight deflation, and your trade, for now, is to go long SPY and gold.  I can only assume the Fed imagines there is some sort of "trickle-down" pathway for all these pixelated dinaros, to arrive at JSP's house just in time for the Christmas holiday shopping season. The direct route - bank to consumer in the form of a loan - ain't happening, so there is your simple reason why this Christmas's retail harvest will be decidely weak, and that is the curtailment of consumer credit.  I suppose people will turn to cashing in their 401ks, providing the government with a double benefit, a tax increase and more cash deployed by consumers.

Fri, 11/13/2009 - 08:12 | 129522 Anonymous
Anonymous's picture

I think, the Taylor Rule with more realistic (i.e. higher) inflation data - some hedonic pricing tricks aren't convincing to me or to the experience of peepz in the streets - and with a nairu of f.e. 8 instead of 5% (I think, that the US hast lost competitiveness, education and industrialization, hence the higher nairu) the results look less depressing (but still a strong case for QE). Got sth like -2.5% target rate with those numbers. Any opinions on this? Greets from Germany.

Fri, 11/13/2009 - 09:13 | 129564 Anonymous
Anonymous's picture

      Gold-Price goes UP vs. Goods & Services
      Gold-Price goes DOWN vs. Goods & Services

         Gold-Price goes DOWN vs. Money // don’t worry – be happy
         Gold-Price goes UP vs. Money // hedge against Goverment / FED
      END IF
         Gold-Price goes DOWN vs. Money // don’t worry – be happy
         Gold-Price goes UP vs. Money // hedge against Goverment / FED
      END IF

What do you mean - is this correct?

Fri, 11/13/2009 - 09:30 | 129570 Anonymous
Anonymous's picture

So oil goes to $100 dollars without a recovery. When does oil start to threaten any start of a recovery on the other side of deflation?

Fri, 11/13/2009 - 19:42 | 130291 snorkeler
snorkeler's picture

When GS says so

Fri, 11/13/2009 - 09:32 | 129572 BennyBoy
BennyBoy's picture

"look for the Fed's "assets" to start growing exponentially quite soon as the deflationary threat truly takes hold."


The QE everyone should be worried about is Qualitative Easing. The rapid easing of the quality of the FED's balance sheet by taking on even more riskier assets than it already has.

For example, we just accepted an IOU for $100B from Llyod on a used napkin. The debt, the napkin, is created out of thin air as is the money we gave him. Everythings in balance.


Fri, 11/13/2009 - 10:29 | 129624 hidingfromhelis
hidingfromhelis's picture

Cash for Trash (C4T?) has been going on for quite a while now.  Think of how many banksters it's saved!  Does anyone have any illusions about the quality of the paper, be it TP or napkins, on the Fed's balance sheet?

Fri, 11/13/2009 - 10:46 | 129638 Highrev
Highrev's picture

Tyler, are you the author of this piece? It was suggested on TF that you are not the author. It's my understanding that everything you post is of your authoring (unless you explicitly give credit to the author), is that correct?

Fri, 11/13/2009 - 11:03 | 129649 curbyourrisk
curbyourrisk's picture

The problem with all the people out there who do not see deflation is they don't understand what the true definition of money is.  I am going to borrow a phrase from Karl Denninger that sums it up rather eloquently.  The monetary base in a credit-based monetary system is not "MO", "M1", "M"" (M prime).  It is the unencumbered assets against which one is both willing and bale to borrow. 

You see, for 15-20 years we had serious inflation from around 1990 to 2007.  No one complained because everyone was happy.  The only problem is this was a credit expansion inflationary period....The worst kind.  Real wages were not increasing, but we all lived like they were.  how so?  Well, the stock market went up rather dramatically in the period and so did our 401K's.  we lived off our percieved wealth.  we spent like we were rich.  Credit was being extended to us like never before in the form of unprecidented high credit limit on credit cards.  We perceived this to further increase our wealth and we spent accordingly (building debt).  On top of this our house were doubling and tripling in value.  So we assumed our wealth did also. We, again, spent accordingly.  Only we were not just happy sepnding against our new found home wealth, we borrowed against two,even three times.  And spent that too.  Al this time, prices were going up.  We did not care, we just spent.  Ya see folks, that's inflation.  When they raise pricesjust because they can.......that's inflation.  it had nothing to do with rising prices, it was all about our perceived increase wealth.

You can not continue to believe that inflation is rising prices.  Rising prices is a function of inflation.  Inflation is rising wages.  They were only able to increase those prices because we were willing and able to spend our money, without indifference.  


Guess what?  Our home prices have crumbles, as with our perceived wealth.  Our 401K's have been reduced to 201K's, as with our perceived wealth.  Our "outrageous" credit lines have been pulled, as with our perceived wealth.  Perceived wealth, was perceived as buying power.  Companies raised prices accordingly.  With perceived wealth and buying power gone......the ability to raise or hold prices has also gone.  The only way to bring inflation back is through rising wages.

You can all stop about the currency going to ZERO and hyper-infation coming.  Hyper-inflation, as you all know, is not inflationary at all.  It is a function of a currency collapse.  It does not take place over time, it happens and awe all are screwed.

Also, please do not mix up market forces and inflation.  If you have finite goods and the price of those goods increase over time, as the supply of goods is diminished...the is not INFLATION.  This is simply the forces of supply and demand at work.  (Although, as in the case of most commodities it can be manipulated.  Anything that can be traded....anything....can be manipulated)  BUT IT IS NOT AND NEVER SHOULD BE COnSIDERED INFLATION.


Ok, I have to get back to work now. 

Fri, 11/13/2009 - 11:48 | 129715 Winisk
Winisk's picture

This inflation/deflation debate is getting tiring.  Quality of life for most people has been deflating in my estimation.  The typical family is working longer and harder with diminishing returns.  The argument is continually made that we live better than our parents because we have more stuff.  Yeah, I have a computer now.  Health care is more advanced.  I'll accept that. But what do we have in return.  It takes two incomes to afford a decent home and just barely at that.  We have less free time. Our children are being raised by daycare and the TV screen or whatever is put in front of them to distract them.  Once the bill comes due for all that stuff purchased with the perceived wealth, it can only get worse.  Demand for goods was pulled forward as Denninger keeps saying. Growth has to be subdued.  It doesn't matter what the government does at this point.  The effect is the same.  A harder life "going forward".

Fri, 11/13/2009 - 11:16 | 129669 Highrev
Highrev's picture

Isn't inflation the antonym of deflation?

Fri, 11/13/2009 - 14:51 | 129962 jbeyer
jbeyer's picture

Highrev, your comments are far too logical for the moronic Hedgies.

How Tyler can reference persistent deflation in the post title, and then reference the EURUSD going to 2 is beyond me.

Will Tyler or one of his fanboys explain how this is possible?  (preferably without a reference to the vampire squid)

Sat, 11/14/2009 - 12:54 | 130642 Mark Beck
Mark Beck's picture

Usually, when one requests information from another party, it is not prefaced by an insult. However, having said this, I will still endeavor to answer your question.

The focus of the article is to illustrate the FED centric use of the Taylor rule (approach) in gauging success in fighting deflation, and more importantly, breaking a deflationary spiral.

A deflationary spiral, as presented by the data, could be called persistent, in the sense that the effects do not abate. Hence the title; Persistent Deflation Means More Fed Intervention Coming Soon. 

So to answer your question;

"How Tyler can reference persistent deflation in the post title, and then reference the EURUSD going to 2 is beyond me. Will Tyler or one of his fanboys explain how this is possible?"

If you have followed the FEDisms (ideology) through the Greenspan era and now Ben, you find they have a certain mind set on economic models and theory, based on a US historical capitalistic economic model. I would argue that their model is outdated. But to continue, in this traditional FED model, after all of the FEDs efforts, the data shows the possible beginnings of a deflationary spiral.

If true, this is an epic failure for the FED, because it shows they no longer understand the economy they are trying to fix.

Ok, so what is the FEDs next move?

Tyler stipulates that the FED will continue to use the old models, and hence must curb deflation at all costs. The FED answer, based on the data, crank up QE to 2x to 4x. This could generate further weakness in the dollar hence $2 to 1 euro. I think, also implied, is the massive liquidity bubble, translated = a possible impending crash, and worse yet, an unlinking of the dollar to equities. That is, falling market and falling dollar.

Hope this helps answer your question.


I would like to stress the possible ramifications for Ben Bernanke and the US. Ben is a student of the depression, his career is the FED, he has access to the best real-time economic data, and controls the money supply. To have all this training and power, and still fail, is unthinkable. Because, by extension, weather we want to admit it to ourselves or not, his failure is our failure. The FEDs actions are being carried out on our behalf and backed by our labor. For good or for ill, this is the reality of the situation. 

Mark Beck

Fri, 11/13/2009 - 11:17 | 129670 Anonymous
Anonymous's picture

the problem can be seen in the recitation of the Taylor Rule...economists believe interest rates cause GDP growth. This is false. Money doesn't cause activity, energy does.

Whether we like it or not, we hit an energy supply maximum a couple of years ago. The consumption necessary to grow to backstop the debts of today simply cannot physically exist. The market is attempting to price that in.

Those who are waiting for cash to become more worthful would be wise to understand that liquidation phases reflect a realistic cash pricing of assets liquidated. Once the liquidation phase is over, prices will renormalize significantly higher. This is the case in every impoverished country because under no circumstances can the maxim of profit be violated by a business. If it costs $15k to build a car, Toyota cannot sell it for less than that. You may get your starving neighbor's car for a great deal, but once the liquidation works through, that's it, we're Brazil. People walk.

The liquidation phase may be dragged out for some time, but there is not going to be any kind of grand future for cashholders; owners of the notes of a bankrupt state ALWAYS get fked. The US is one of the most bankrupt states.

China has entire cities that are empty, they have overcapacity in every sector; they are as dependent upon the debt bubble as we are.

Listen; credit money is simple. The interest is a claim on future production's growth. That future production now CANNOT occur. Consequently, the entire foundation of the creditmoney system is collapsing. It's really as simple as that. This is not a monetary crisis, it is a solvency crisis. We are at a significant epoch.

Fri, 11/13/2009 - 12:11 | 129761 Anonymous
Anonymous's picture

a truly fascinating theory. where did you get it? do you have any more on this?

Fri, 11/13/2009 - 17:54 | 130179 Anonymous
Anonymous's picture

It's my own.

It reflects acceptance of what credit monetary systems are and what the money ostensibly is backstopped by.

I've struggled in vain on many forums for years to get people to accept that energy is growth. Energy supply is no longer growing, consequently the necessary input to the future growth needed to backstop today's debt will not exist absent a revolutionary new growable energy supply.

It's really as simple as EROI and asymptotic laws of diminishing returns. While oil was increasing in supply every year, the future looked great. You could borrow today and pay plus interest tomorrow, using the production enabled by the increase in oil supply. Problem now is that oil supply is actually declining. Existing activity is now fighting for viability in order to repay tomorrow's interest and today's debts.

In essence, economists' arrogance convinced them that interest rate regimes were the driver of growth, when in actuality we all rode an energy supply curve. Now, they are befuddled as to why reality won't bend itself to their monetary prodding. They have to accept what I have told people; no amount of money can adjust the laws of physics. This is the critical realization in the thesis, that for example once an oil well passes peak, no amount of money can make it produce more net barrels next year than this. Sure, you can increase nominal production but at the expense of increased energy input costs, so your NET declines. It doesn't matter if the thing is "economical" or not, physics do not care about economics, which is a pseudoscience.

There has been a collective point of recognition that the future is one of competitive scarcity not abundance. There are a number of industrial commodities which have now peaked, very important ones like Helium and Oil, and there is also gold which has seen declining production since 2000. Helium hit it in 2002, and oil probably in 2005 at least as far as C&C goes.

Against this reality of increasing scarcity of energy and other things, it is difficult to envision being able to repay the debts of today plus interest. A lot of late-stage boom economic activity was very marginally profitable and now simply isn't because the material inputs to it have risen in cost.

Imagine the economic activity growth and taxation that would need to occur simply to pay off today's US debt. It's staggering and compounding interest does not have to obey any physical constraints. Physical systems such as real production and real people driving real cars real miles do.

This is precisely why the economy transferred to a synthetic basis when the real economy could no longer manage to service the need for debt growth. CDSs presented the capability to manufacture synthetic bonds which had only a very cursory nexus to the real world. That allowed debt to continue to grow exponentially while the real economy had peaked in 2005. The problem with the exponential curve is that people fail to understand it. At any given doubling interval, one must marshal the same amount of whatever as all the whatever previously in history.

Our national debt doubles every 8 or 9 years historically. The problem is that at next doubling it will hit $24T, then $48T. These figures are untenable, as is the debt monetary system in the aggregate.

Fri, 11/13/2009 - 20:13 | 130315 Apocalypse Now
Apocalypse Now's picture

I like your theory and believe it is simply E=mc^2 applied to economics.

And I believe that they have tried to lead with debt, and that it is a motivator for mankind (to pay it off and be active) on a truly philosopher king level.  Energy itself has been one of the most important factors in economic growth due to its cost in converting raw materials into finished goods for the production process, petroleum products, and transportation to a final destination.

New alternative technologies could completely change the game, and I am not sure how ingenuity or intellectual property plays into your thesis.  The debt to foreign countries must be paid off, the debt to the fed should not be - they already own the gold in fort knox - just revalue the price of gold per ounce and pay it off.

Tue, 11/17/2009 - 00:24 | 132826 TumblingDice
TumblingDice's picture

Very well articulated anon. One cannot possibly hope to project the future without considering our physical universe, as so many economists try to do nowadays. Peak energy is very real considering the fact that never before had we had the energy efficincy and production go down at the same time; whenever efficiency went down in the past, the loss of energy was always replaced by higher production.

And you are right that the synthetic nature of today's economy was a pretty rational manifestation of the necesity of ever higher debt for the monetary system to sustain itself. Otherwise it would have collapsed due to the fact that it is a credit based system. Now we are in the ponzi stage. The new money and debt is being less and less backed by actual production (which of course requires energy) and more and more by other debt and money. This pyramid scheme is unsustainable but it would be good and necessasry if the borrowed time that it allowed for was actually applied towards the things necessary for our species' survival (and don't get me wrong I don't like government spending, I would have much rather had the private sector take care of the whole energy issue by itself) like alternative energy. But this has not been the case, it has been used for competative advatage in the synthetic products that create this borrowed time.

Thinking about all this leads me to two conclusions: the personal conclusion is that I will focus my investments in energy, weighted towards promising solar energy. The broad conclusion is that I feel an obligation to run for office and either make the government stop the madness so that the private sector can be allowed to solve the problem on its own (read: endthefed, restore a free market economy) or if that cannot be accomplished, direct the madness towards the things I forsee as necessary to our species' survival (in the fairest way possible of course, based on utility instead of need). I know the latter solution might make some people cringe here, but the priority of survival over fairness is something that I cannot compromise, even if this priority structure is abused most of the time. We must ensure survival first, before we can restore fairness. We cannot see the social fabric break down since government is the one with all the weapons and more likely than not it is the one that will fill the vacuum.

Wed, 12/02/2009 - 21:06 | 149971 Anonymous
Anonymous's picture

Please do give us a name so we can follow your future posts. Your perspective is certainly novel and an eye opener as far as I am concerned. Speaking for myself, you are most eagerly read on this site already.

Keep posting, what you write may well help us get an advance peek at our next monetary system.

Many thanks


Sat, 11/14/2009 - 17:36 | 130805 Anonymous
Anonymous's picture

Your theory is similar with Stoneleigh over at the The Automatic Earth. You ought to try your hand there and trade notes with her. Ilargi-who runs the site-is a reasonably bright guy but not Stoneleigh's equal (I'd argue few are), so if you don't like what Ilargi writes wait until you've seen Stoneleigh before making judgment.

The question is how to move across assets classes as our overall system moves down in real terms. I.e., is it better to make deflation bets or inflation bets, and how do you time when to move from one to the other, and how many waves will occur on the way down?

Fri, 12/04/2009 - 00:01 | 151919 Anonymous
Anonymous's picture

Are you Dr Colin Campbell?


Sat, 11/14/2009 - 11:37 | 130613 Anonymous
Anonymous's picture

I am a long time lurker and this is my first post. I just had to pipe up to say that posts 129670 and 130179 are a stroke of brillance.

There are shades of Chris Martinsen in your theory, and you have done an admirable job of "connecting the dots" between the need for a reliable, sustainable, increasable (is that a word?) source of energy, and the ability to continue to produce a reliable, sustainable growing economy.

Your theory also explains why our economy veered into all things synthetic in the last several years--it's been nothing more than a desperate attempt to maintain the status quo in the face of the inescapable (for now) brick wall of Peak Energy. If I understand you correctly, the world economy will have to slide down the back of Hubbert's Curve unless another viable source of energy is implemented. Until then, we have no choice but to ratchet down our growth to whatever can be sustained by our current energy production--and anything beyond that is simply an illusion--borrowing from tomorrow's production to use today.

Wow--you've really made me think today. Thank you!

Mon, 11/16/2009 - 12:34 | 131845 Anonymous
Anonymous's picture

I graciously appreciate everybody's compliments.

The irony is that the espousement of these theories will get you banned at some of the cult forums referenced by others daily in these threads, specifically Market Ticker.

I may bear some resemblance to Automatic Earth and/or Martenson, but I made these realizations prior to ever coming across their material. I certainly do not lay claim to being exclusively able to come to these conclusions.

The entirety of the Industrial Revolution was inarguably caused by oil, not credit. Energy made it. We slide down the backside of the oil supply curve as EROI diminishes.

This is in the McHugh/EW sense, Wave 4, which must necessarily retrace some portion of either everything since the Depression, everything since the onset of the Industrial Revolution, or everything since the Renaissance. This is the inevitable conclusion that EW theory of retracement sets forth and while I cannot say that EW has any predictive value, looking backward it is easy to say ok, here was a retracement of a previous advance and within a particular historical scale.

Oil supply drove everything that has been done for the past 100 years, as it goes, we go. The banking system rode the back of that like a harlot.

The biggest danger now is the peak curve. The period after C&C peak in 2005 was one of running on fumes, drawing down inventories, and a price spike. This led directly to collapse of a lot of marginally economical activity. Just outright collapse. Not a slow drawdown, due to the creditmoney system, sudden default is the trend now. The decrease in economic activity placed consumption again below production, but as the system rebounds and consumption increases, we will smack into an overhead supply curve which is now declining.

Another oil price spike seems inevitable and this time there will be no way anyone can deny what has transpired. Some of the YoY decline rate data is apocalyptically bad, specifically relating field age and type to past-peak decline rate, time-to-peak...I mean look at Cantarell. This is just insanely bad from what was the world's 2nd largest producing field.

Employment of secondary and tertiary extraction techniques in what would otherwise be the field's primary extraction phase have shortened field lifespan, dramatically increased decline rates, all to maximize present production. This is an artifact again of exponential growth. The parable of the king and the chessboard is essential to understanding this.

We *had* to get as much oil out now to service the present square's growth needs, otherwise we faced crash of debtmoney systems. It was not enough to maximize overall RR, the exponential growth animal of compounding interest MAKES you maximize now to pay growth claims. We may very well destroy ourselves over abstract concepts such as "debt" and interest. Perhaps those cultures that have banned such things at times throughout history were wiser than we gave them credit for.

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