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Tired (And Broke) From All The "QE Is Just An Asset Swap" Rhetoric? Then Read This

Tyler Durden's picture


If you, like us, are tired of all the textbook pundits claiming over and over again that QE is nothing but an asset swap (odd how asset swaps get food prices to hit all time highs, not to mention M2, and to reverse what has formerly been a trillion dollar annualized drop in shadow banking - must be that latest outbreak of disinflation...), we urge you to read the following essay from Sean Corrigan. The Diapason Securities strategist as usual manages to cut through the academic drivel and hit at the core of the issue. The conclusion: "money does not have to be borrowed into existence, it can be
spent into existence by the state for so long as that money's recipients
show a willingness to accept it as a medium of exchange - and that is
exactly what we have at work here...
the government spends money it does not have into existence and
disburses it through its welfare/patronage network; the associated debt
is then taken up by a monetary institution (not least, the Fed itself,
whether by its earlier process of debt substitution on private sector
balance sheets when it was buying MBS, or in its current, direct uptake
of Treasuries at the NYFRB) and the non-bank sector ends up with increased holdings of new MONEY as a result... The Fed has successfully placed a great deal of new
money in the hands of those same banks' customers and this is patently
exerting its expected influence on the prices of a whole range of
non-money goods and assets, in a typically differentiated,
Cantillon-effect fashion. How anyone can deny this is truly a mystery!" Indeed.

From Sean Corrigan's February 18 Material Evidence

Last week, we appended a graph which we felt showed that the Fed was clearly complicit in producing the current rise in commodity prices - a contention which we foolishly thought was unexceptional. One criticism which quickly emerged was that the graph did not show such a link; another was that this did not apply to commodity prices (obviously responding, therefore, to their 'fundamentals') since the Fed was 'only' creating excess bank reserves before locking them safely away from where they could influence the price of anything much at all. In order to address these two cavils, we unapologetically reproduce a more detailed version of the same graph, together with some extra supporting evidence of the crime and the following address to the jury.

As we maintain that this graph shows, not only has AMS been driven by the Fed, but the excess money has clearly had an impact on commodity prices - whether via simplistic quantity theory means (more paper per resource unit) or by boosting speculative expectations (with not a little cheerleading from Blackhawk Ben) and hence bringing about the near record long positioning evident in many contracts. (Let us not either forget the impact of all the similar programmes enacted everywhere else in the world)

Next, we must counter the casuistic Bernanke defence that all he has undertaken is an 'asset swap' and not a monetization and then deal with the widespread misperception that the build up of excess bank reserves has somehow 'sterilised' the associated money creation.

In the first place, we simply need to say that the 'swap' being made — whether, as now, through regular POMOs or via the initial alphabet soup of lending programmes — is irrefutably one of non-money for money, presumably the very definition of 'monetization', whatever semantic games the Fed and its partisans wish to play.

Furthermore, look at the other figures which show the influence the Federal budget is having on the supply of money at a time when, yes, much private borrowing has been curtailed and, so, when it has not been the primary means for money creation, as it is in more normal circumstances.

What all too many commentators overlook — each either eager to beat the deflationary drum and so justify even more interventionism, or else to deny that their own favoured asset class is in another bubble — is that, as Leland Yeager long ago wrote, money does not have to be borrowed into existence, it can be spent into existence by the state for so long as that money's recipients show a willingness to accept it as a medium of exchange - and that is exactly what we have at work here.

So, the government spends money it does not have into existence and disburses it through its welfare/patronage network; the associated debt is then taken up by a monetary institution (not least, the Fed itself, whether by its earlier process of debt substitution on private sector balance sheets when it was buying MBS, or in its current, direct uptake of Treasuries at the NYFRB) and the non-bank sector ends up with increased holdings of new MONEY as a result.

The fact that the banks - for whom most of this money represents a liability — now largely offset it on the asset side of their balance sheets by placing it with the Fed (in the form of excess reserves), rather than re-lending it to others, does NOT somehow cancel out the creation of this money, it simply suppresses the commercial banking sector's possibilities for further multiplying it via the traditional operation of the fractional reserve mechanism.

So, granted, the banks are not taking the first injection of newly created money and generating 10 times, 15 times - or whatever - more money from it, in addition. But the Fed has nonetheless successfully placed a great deal of new money in the hands of those same banks' customers and this is patently exerting its expected influence on the prices of a whole range of non-money goods and assets, in a typically differentiated, Cantillon-effect fashion.

How anyone can deny this is truly a mystery!


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Sat, 02/19/2011 - 17:02 | Link to Comment bob_dabolina
bob_dabolina's picture

Well no shit.

How do you think u-6 expands at the same rate as foodstamps?

I thought this was common knowledge.

M2 = Food stamp dependancy. Draw a chart for yourself.

Of course Nancy Pelosi will tell you this is good for the economy.

*However that money is technically borrowed from the Fed because the people have to pay it back either through inflation, higher taxes, and/or higher interest rates or thrice

In otherwords it is borrowed into existance but it is borrowed into existance by the welfare recipients. The same class that will pay the highest tax and the largest hit to their purchasing power. This is also very negative because instead of productive entities borrowing money into existance we have unproductive entities borrowing money into existance.

This is a very dangerous paradigm as the borrowed money is no longer put to productive capacity but instead redistributed into unproductive facets of our economy which will in turn require more borrowing atever increasing multiples.

Sat, 02/19/2011 - 18:37 | Link to Comment IQ 145
IQ 145's picture

 Well, maybe the rising prices are just an innocent co-incidence ?

Sat, 02/19/2011 - 20:35 | Link to Comment chrisd
chrisd's picture

Pelosi said that paying unemployment was better for the economy than not (when Republicans did not want to extend UE benefits), which is true. All politicians are morons and worth making fun of, but we can do that without twisting their words or meanings.

Sat, 02/19/2011 - 20:56 | Link to Comment bob_dabolina
bob_dabolina's picture

Extending unemployment is the worst thing you can do (long term) because the money that is borrowed will have to be paid back with interest. It's the interest component that people like to ignore.

More borrowing (for unemployment) = higher interest in the long run. The higher the interest the lest we can afford benefits in the future.



Sun, 02/20/2011 - 14:33 | Link to Comment chrisd
chrisd's picture

That is true of all money borrowed. There are other places to cut the budget then denying the people most in need. This isn't a country that kicks its people to the curb because the Fed has chosen the banks over the people.

Sun, 02/20/2011 - 22:28 | Link to Comment tarsubil
tarsubil's picture

The people getting those handouts are regressing. You can't say that those handouts are helpful. They are destructive to the economy and to those receiving them. The Man does benefit from real estate deals like went down with Chicago's projects. If you truly care about those people, you'll cut state sponsored handouts and either help people directly or through your church.

Mon, 02/21/2011 - 05:06 | Link to Comment GoinFawr
GoinFawr's picture

same with car insurance or health insurance freeloaders.

Next time you get in an accident that is someone else's fault, get help from your church. Freeloading  on the insurance companies hurts the economy. Nevermind the premiums you paid, that helped the insur... economy, and for that we thank you. Now buck up and cure your own cancer or take on the full cost of treatment despite paying for health insurance, you fucking deadbeat. You probably knew you were sick when you tricked those helpless insurance companies into providing you with coverage anyway, so how could you do that to your good friends who only care about you? I got your 'handout' for you right here.


See how that works?

Mon, 02/21/2011 - 05:13 | Link to Comment GoinFawr
GoinFawr's picture

Aren't unemployment bene's covered by the premiums, that have been paid and are being deducted from every paycheque earned by every working stiff?

Unless the premiums have been cut and I missed it, that sounds like a program that funds itself, could even provide a surplus, so no borrowing or subsequent interest necessary.

In fact, you could say that those collecting are just recouping money they have already earned and saved by investing that wealth in an insurance policy.

Oh sorry, did that fuck your stupid 'kick 'em when they're down' argument?

 You duped dogs are sniffing around the wrong assholes.

Mon, 02/28/2011 - 15:02 | Link to Comment Chump
Chump's picture

If you really think someone has "earned and saved" in "premiums" to cover 99+ weeks of unemployment then you can't be helped.  Stupidity in a concentration that potent is quite lethal.

Mon, 02/28/2011 - 17:20 | Link to Comment GoinFawr
GoinFawr's picture

Speaking of which, rubedom "in a concentration that potent"  does go a long way to explaining your choice of avatar; IE you're even dumber than you look.

The only thing that is going to be fatal here is a general adherence to the misdirected divisive rote spewed out by the likes of fructose soaked you.

I mean, if you're seriously trying to tell me that a plant electrician of 30 years hasn't paid enough in premiums/taxes to cover the 99 weeks he now has to collect because you just had to have a leaf rake of lower quality made in china instead of the one manufactured in the us that cost a dollar more, I'd say grade 8 mathematics is going to be the worst 5 years of your life.

Bonne Chance!

FWIW: Yes, the uS is broke, but that is not  the fault of our honest electrician above. All I am saying is that there are far, far bigger fish to fry before we turn him and his out into the street so that the banksters can continue getting their ever increasing bonuses, and impoverished, defenceless nations can continue getting their ever increasingly expensive doses of 'smart' bombs launched from murder drones. Get it?

Mon, 02/28/2011 - 22:42 | Link to Comment Chump
Chump's picture

Meh, unemployment insurance is bullshit and has been since its inception.  What an insult to be forced to accept lower wages so that my employer can be forced to pay into a fund for me, "just in case."  Ridiculous.  All so we can have you pretend that there actually is some fund somewhere that I'm collecting from, complete with an accounting of what my employers have paid in along with what I've collected.  I wonder how your honest electrician feels about collecting that 98th week right alongside some kid he trained and worked at the company for 3 years before shit went sour.

But regardless, I was an asshole to you for no reason, and I'm sorry.  Your overall point rings loud and true, and reminds me of what's truly at stake:

"All I am saying is that there are far, far bigger fish to fry..."

And you are, of course, absolutely spot on.  I'll get back to bitching about wealth distribution once some bankers are swinging from lamp posts.

Cheers, be well.

Tue, 03/01/2011 - 00:41 | Link to Comment GoinFawr
GoinFawr's picture

 " I wonder how your honest electrician feels about collecting that 98th week right alongside some kid he trained and worked at the company for 3 years before shit went sour."

Indeud, I bet he feels like crap, but I'd give good odds he still feels at least marginally better than if he and his family had been forced to live in a tent by the highway, so far anyway.

As to rest, effing fantastic! Damn big of you in fact. I'll try to keep it in mind the next time my inner asshole tries to put peanut butter around my lips and excrete some bullshit.

Best regards. 


Sun, 02/20/2011 - 15:03 | Link to Comment snowball777
snowball777's picture

a) Foodstamps are a pittance compared to the rise in M2

b) They're also merely stealth price supports for agri-biz

c) $25B....or 1/5th the size of the TBTF bonus pool.

Find another patsy; those people would not be spending cash or putting their groceries on credit cards in the absence of SNAP benefits.

Would unemployed farm workers contribute to U6 too? You betcha!

Sat, 02/19/2011 - 17:10 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Maybe Cullen Roche can come on down to the bear pit and we can all watch a good scrap - I have to give it to man , he can take punishment as much as he can dish it out.

But lets face it he has the "authorties" on his side and also has grown from various stimulus products.

Tickets please.


Sat, 02/19/2011 - 22:07 | Link to Comment TPC
TPC's picture

I'm your huckleberry.

The truth is, the accounting behind QE is no different than standard monetary operations performed at the short end of the curve.  All the Fed can do is shuffle reserves around in exchange for pvt sector assets.  In the case of QE, it's simple.  The banks have cash.  The banks buy bonds.  The Fed comes along and says, "give me your bonds".  The banks get reserves.  The Fed gets bonds.  It's that simple.  To deny that it's not a swap is to say that there are more pvt sector assets in the system.  That is patently false. There is no change in pvt sector net financial assets.  I think we can all agree on that. 

As for the monetization question - I covered it thoroughly here:

You don't really think the US govt would have stopped spending money without QE do you?  We all know they'll spend to their hearts content.  There is no constraint on the US govt's ability to spend.  Not taxes, not bond issuance.  To deny as much is to deny that the US monetary system changed in 1971.  If you want to argue that deficit spending can be inflationary then fine.  I won't argue that.  But the spending has been quite meager compared to the overall money supply as evidenced by the continuing decline in M3.  The govt has hardly even offset the de-levering which is why inflation has remained very low in the USA.  The real juice comes from the banking system's ability to leverage govt money.  And that quite simply is not occurring.  That's why everyone who said the explosion in M1 would cause hyperinflation, ended up being wrong. 

As for food inflation - I won't deny that speculation due to Fed policy is causing prices to jump.  But let's not forget that this has been a fundamentally driven problem in Asia for many years.  Let's also remember that China's money supply is absolutely exploding.  You think the 16% increase in USA M2 in recent years is a big deal?  How about the 70% explosion in China's M2.  That's where the real juice is in the food inflation story.  China's central bank is flat out insane.  These people are just printing money and building shit in the middle of nowhere in order to juice their GDP.  But yes, I agree that the Fed is not helping though it's not coming from the money supply as much as it's coming from the speculation side.  That's a psychological element.  Not a monetary one. 

As for the people who have lost money due to Fed policy.  Well, they're gluttons for punishment.  Readers at ZH are well aware the Fed policy has a very high correlation with rising equity prices.  I discussed this in detail in October.   Tyler, obviously, has been all over it. 

The readers here and at pragcap have some fundamental differences, but all in all we're not far off.  We all think the Fed should be ended and we all agree that the govt is a poor allocator of resources.  The differences we mainly have come down to a matter of an accounting identity:  The deficit of the entire government (federal, state, and local) is always equal (by definition) to the current account deficit plus the private sector balance (excess of private saving over investment). We can quibble over the extent of the govt's involvement in the economy, but to say that the govt can't ever spend is to reject the above identity.  And that's like rejecting the fact that 1+1=2. 



Sat, 02/19/2011 - 22:27 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Cullen , your a heavyweight and I'm a fly at best - beside I'm slightly drunk as I am Irish and it is sat/sun night.

But you must admit that when the US goes into deficit particularly extreme deficit it is taking the surplus from the rest of us.

While the global police man may be given a break - the US is truely taking the piss with the fraudulent money creation on the back of this base sovergin money.

Pre 1971 you guys created real capital forming technology on the back of this exorbitant privilege but apple and Microsoft just does not cut it anymore - its over , the world has to move on.

The 1990s were your last chance and you blew it  - game over.

Capital has to be recognized in some form - infinite credit formation is just too corrupting to the body politic.

Sat, 02/19/2011 - 22:51 | Link to Comment TPC
TPC's picture

Don't sell yourself short.  I am an Irishman myself and I am familiar with the routine on Saturday night.  Although here in CA it's only 6:30 so I have some time in front of me....:-)

The US govt has been running a deficit for roughly 95% of the last 200 years.  So yes, I do disagree that budget deficits steal from the rest of us.  The truth is, if we are going to run a current account deficit then the govt must spend if the private sector desires to save.  Again, this is an accounting identity.  As the monopoly issuer of currency it can be no other way.  It's not a coincidence, after all, that the budget surpluses of 1929 and 1999 were immediately followed by economic catastrophes.  

And today is a great example.  The pvt sector was thrown deeply into debt in the 90's and 00's.  This was partly due to the budget surplus, but also due to sheer greed and ignorance on the household sector's part.  Anyhow, we now find ourselves in this debt hole.  So, if the pvt sector wishes to de-leverage (and save) then the govt MUST spend.  Why?  Because we are running a -3% CA deficit.  So, in order for the pvt sector to save even 1 penny the govt sector MUST run a budget deficit of 3.000000001%.  If they don't the economy sinks and we risk a Japan repeat or something worse.  It's just an accounting fact.  It's double entry bookkeeping and it's as old as modern economics. 

That takes us to a very different debate - one of whether the govt should intervene to stop recessions.  I think they should (TO AN EXTENT).  This is where Tyler and I would likely diverge in our economic views.  I have been in favor of deficits via tax cuts as opposed to wasteful govt spending.  We were both in favor of sinking the banking system, however.  I would have crushed them like the Swedes did.  It was an enormous mistake to bailout these fools.  I think most readers here would even agree with me that they'd like lower taxes. 

These problems are far from over.  They will re-emerge in the coming years.  It looks to me like there are signs of re-leveraging and debt bubbles forming again.  China is clearly out of control.  And when the sh*t hits the fan next time there will be no political will to stop what is coming.  It will be interesting when it happens because the idiots in Congress will be totally blind sided by it. 

Anyhow, enjoy your Saturday night. Sorry to have wasted part of it with this economics nonsense. 


Sat, 02/19/2011 - 23:04 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

I actually don't disagree much with your mechanics as much as I understand it , I just don't see how just credit can be the basis of a entire money supply - I cannot get a feel for value in such a system.

The euro has been a car crash given its crazy fiscal rules which have created a malinvestment disaster - the most fiscally conservative nation as you know is up shit creek but but we need a fixed point of reference and some discipline somewhere.

The problem has been the %  increase of money creation - and also its ratio.

At the very least we  need to tether gold to the M1 or even physical cash - something of value we can all agree on.

PS I believe the swedes had a substantial part of their banking ecosystem configured for non credit forming loans - this changed in the 80s , Coincidence ?

Sat, 02/19/2011 - 23:13 | Link to Comment TPC
TPC's picture

This is the major problem in the world today.  The banks are the epicenter of it all and we've allowed them to impose their will on the rest of us.  So, govt policy is built largely around their survival and our leaders have all been tricked into believing that the banks are an integral part of the well being of our system.  It's resulted in this mass financialization of the global economy and the imbalances from it are obvious. 

I personally believe the solution is a smaller and constrained banking system.  But that's just me.  I would also like to end the Fed and get the govt out of the interest rate manipulation game.  Those two responses would go a long way to helping create a more stable and sound financial system. 

Have a nice weekend. 



Sat, 02/19/2011 - 23:19 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture


Sun, 02/20/2011 - 05:37 | Link to Comment virgule
virgule's picture

If you push this kind of reasoning to the limit, every form of trading is a kind of asset swap. My stuff, in exchange for your stuff.

So at some "macro point" (with the Fed actions) money becomes swaped with non-money, and money/none-money swaped with food, commodities and anything else that doesn't ressemble money...because you just can't trust money anymore, for anything except very short term needs (for the moment, even that could change).

My personal situation is very close to that of Simon Black/Foreign Man, very much detached from any specific country or government. I've lived with the philosophy outlined above, of exiting from all forms of "government money" for the past 2 years (I keep cash, but only for my 30-45 day needs). Instead I buy things which I believe will hold a decent exchange-value no matter what happens next. I have never felt so free and secure from the wrong-doings of politicians and financial elite. At the same time, I am frightened to I hear the negative experiences of other people in similar situations of independance. They seem to be a lot less happy than me.

If everyone starts doing like me, at a macro level it will look like a bank-run on all forms of government monetary systems (not taking cash out, but pulling out of the system)

I think the increases we're seeing in commodity and food prices, and the people-protests we're seeing around the world, happen to be the early stages of such run on the global system.

Perhaps we'll never see hyper-inflation, but will we maintain the present systems forever?

Sun, 02/20/2011 - 12:17 | Link to Comment Sisyphus
Sisyphus's picture

Good to see you back, TPC!

Sun, 02/20/2011 - 12:23 | Link to Comment EscapeKey
EscapeKey's picture

That's been the way for quite some time already. This is what my current book says about Citi:

"The SEC revelations about Citibank were shocking for what they said about the United States' most aggressive bank, and equally shocking for what they revealed about the SEC itself. After proving conclusively that Citibank had been systematically breaking the law, the SEC's enforcement staff refused to take any action against the bank on the ground that its pursuit of unlawful profits accorded with "reasonable and standard business judgment". The SEC also concluded that Citibank's management had no duty to disclose improper actions since the bank had never claimed its top officers possessed "honesty and integrety".

"In Banks we Trust", Penny Lernoux, page 37, (c) 1984.

Sun, 02/20/2011 - 14:20 | Link to Comment prophet_banker
prophet_banker's picture

for nearly 3 years the real $ supply has been shrinking.  b4 that, in 2006 the fed stopped reporting m3, and we had to rely on the likes of Ron Paul's congressional testomony that m3 was growing at 18% in 2008.



but  what needs to pointed out is the false link to causation; to say when commercial banks make loans is isn't inflationary, but when FRB does it is is false.  truth is our money sytem is more like a PONZI SCHEME collapsing on itself. 

Sun, 02/20/2011 - 12:35 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

"There is no change in pvt sector net financial assets."


What QE supporters and Bernokio himself fail to point out is the pass-through effect. 

When the Fed buys treasury debt, new money is passed from the Fed through the PD to the federal government where it is spent in the economy, increasing (inflatig) the "street-level" money supply, diluting the value of each dollar, resulting in rising prices for goods and services.

It's a two-step process rather than a one-step process if the Fed bought treasury debt directly from the Treasury, which the federal reserve act prohibits. The Fed gets around this prohibition by having PDs buy treasury debt then buying it from PDs.

Sun, 02/20/2011 - 12:57 | Link to Comment Hulk
Hulk's picture

404 on your second link

Sat, 02/19/2011 - 16:54 | Link to Comment Sudden Debt
Sudden Debt's picture

THE silver comex Will tell us at THE end of THE month of people keep on accepting paper money, as snotter record amount Will stand for dekverf :)

Sat, 02/19/2011 - 16:55 | Link to Comment EscapeKey
EscapeKey's picture

Well of course the FRB knows this, their role is to lie about everything, in the faint hope people will swallow said lies and keep their retirements in AAA rated government securities.

Gold and silver, fiatchez!

Sun, 02/20/2011 - 08:52 | Link to Comment Snidley Whipsnae
Snidley Whipsnae's picture

We constantly hear the refrain 'don't fight the Fed'. We also know that one thrust of the Fed's current policies are an attempt to break the Chinese Yuan peg to the dollar. Printing 'lots more dollars' and letting them flood into China, whether via hot money flows or via Wal Mart (retail purchases), turns out to have the same effect in China since China purchases the inflow of dollars and then issues Yuan in exchange. So the Chinese Gov has little choice about printing more money if they wish to maintain the Yuan peg, and wish to remain the lowest price volumn exporter, and wish to continue to sell to the US and the rest of the world. China's is a mercantilist economy, iows.

What if China wished to stop printing more Yuan for dollars, thereby slowing inflation in their own economy? How would they go about it?

China could erect trade barriers with the US, ie, stop taking dollars for their exports. Of course, as long as the dollar is the world reserve currency, and most OIL trades are settled in dollars, and China needs lots of OIL, this is not going to happen...and, supposedly as long as the US provides military protection for the major ME oil producers they will accept only dollars for oil. 

What other action might China take to stop the flow of dollars into China? They could borrow from the old US/Western playbook and require payment in commodities, specifically in PMs. When the world was on the gold standard and the US was the worlds largest OIL exporter (yes, the US was the worlds largest oil exporter prior to WW2) and largest exporter of most manufactured goods, the US required payment for exports in gold or other commodities. This caused balance of payments and currencies to be mostly self regulating. If a foreign country did not have the gold (or other commodities) to pay, they didn't get the finished goods, or oil, or other commodities from the US.

What does this ramble have to do with the price of bananas, you ask?

I believe that the Fed, other central banks, and the Chinese monetary authorities all recognize that the great problem that exists in the world economy is caused by the freedom of all governments and central banks to print all the fiat currency that they think they need. Since the quantity of the fiat currency and debt instruments no longer have ANY relationship to the amount of acutal commodities available for consumption this will lead to inflation and, in some countries, hyperinflation. We are seeing it now.

China is currently purchasing PMs as fast as possible through every means possible...even purchasing paper ETFs and taking delivery of the (supposed) underlying physical metals... For what purpose, you might ask.

I believe that the only reasonable conclusion for China's enormous PM and other commodity purchases is to accumulate enough PMs, and foreign debt instruments, to force the introduction of a new currency that is backed, to some extent, with PMs...Not neccessarily the Yuan...but perhaps a world  currency for settlement of international trade. Of course the Fed, and all western central banks, will fight this change to the death...we are seeing this now as well. That the citizens of the world are casualties in this economic war is not a consideration for western central banks. Western central banks are certain that western citizens will not revolt. China's government is not so certain...China has seen many uprisings of citizens and toppling of governments.

But, China is certain that they can outproduce any other country in the world, ie; more production per bbl of crude oil consumed, low labor costs, little if any gov social spending, environmental destruction, etc, and China is not afraid of competition from the 'developed' countries that have huge social transfer payment programs. Of course, the western central banks might win this economic battle and China might go down in inflationary flames...historically central planning has not worked out well.

But, if the Chinese win the economic battle the refrain might become; 'Don't fight the Chinese'...

Physical wars between nations are generally sporadic events, economic warfare is continous.






Sun, 02/20/2011 - 11:38 | Link to Comment hardcleareye
hardcleareye's picture


Sun, 02/20/2011 - 12:05 | Link to Comment Sean7k
Sean7k's picture

Nice piece Snidley. There may be another possibility- the scramble for the only real money in the world- gold. I don't think China wants to have worked that hard and saved so much to be left with so little.

Sun, 02/20/2011 - 14:27 | Link to Comment prophet_banker
prophet_banker's picture

[freedom of all governments and central banks to print all the fiat currency]


for factual accuracy, commercial banks create %95 - %98 of currency, through out the world.  And CREATE should nearly always replace the word PRINT.





Sun, 02/20/2011 - 21:44 | Link to Comment Chump
Chump's picture

Thanks for this.

Mon, 02/21/2011 - 00:38 | Link to Comment ThePhysicist
ThePhysicist's picture

The ultimate endgame bartering tool is food, and the U.S. has great agricultural capacity. Starvation of the Chinese masses is the one thing that will bring about revolution in China.

Mon, 02/21/2011 - 08:07 | Link to Comment equity_momo
equity_momo's picture

You cant grow or deliver food without oil.  The ultimate endgame bartering tool in a World of 7 billion people is oil. 

Sat, 02/19/2011 - 17:06 | Link to Comment falak pema
falak pema's picture

Asset swaps, non monetized, as per Benbernankification, would be a trade selling JPM's ETFs to those who bought physical silver at the coin dealer and asking them an 'asset swap' whereby they took ETFs at face value and delivered their physical silver to JPM in exchange...irrespective of the market's true appreciation of the ETF? Right?

Sat, 02/19/2011 - 20:30 | Link to Comment AmCockerSpaniel
AmCockerSpaniel's picture

pema; You think like I do here. This does not pass the smell test.

Sat, 02/19/2011 - 17:16 | Link to Comment blindfaith
blindfaith's picture

History is littered with examples of people in charge that did not know what they were doing. Most of those examples are people who held titled posts in the US government.

We always hire/appoint people who have a great view in the rear view mirror but can't see the forest for the trees.


Sat, 02/19/2011 - 18:57 | Link to Comment Yancey Ward
Yancey Ward's picture

Bingo.  There is far too much faith in the actual ability of government officials and other leading lights of society.  This why deep centralization of authority eventually turns disastrous.

Sun, 02/20/2011 - 12:03 | Link to Comment dwdollar
dwdollar's picture

But the problem is with society, not the government.  As a society, we place the 'educated' on a pillar and hand them the finest jobs.  Education in our society is little more than memorizing a book of historical facts and theories.  How well you can regurgitate them on an exam is how 'intelligent' you are as a person.  Those that envision the future face tremendous barriers within the system.  At best, they are ignored, at worst, they're laughed at and shunned.

Sun, 02/20/2011 - 14:34 | Link to Comment prophet_banker
prophet_banker's picture

+1 for pointing out the systemic group think

Sun, 02/20/2011 - 14:33 | Link to Comment prophet_banker
prophet_banker's picture




Your assumption that the current scenerio wasn't pre-planned needs questioning.  Check out the hegelian dialectic, what has happened was planned to happen, and our leaders just claim the opposite, "we didn't expect that, it just happened that way" = lie

Sat, 02/19/2011 - 17:25 | Link to Comment Instant Karma
Instant Karma's picture

Association is not causation. But in this case money is gushing out of central banks and going everywhere--Chinese real estate, the price of cotton, metals, and sustaining many a bankrupt nation (US, UK, Japan). This board tends to get too parochial in its understanding of the world of money.

I'm no Gordon Gekko but the Bernanke is not the only central banker shooting money out of a firehose to stabilize the economy and the banking system. The UK, Japan, and the Euro zone are doing more or less the same thing. China is pumping out money too, look at their ghost cities and their speculative property bubble. The tricky thing is, when bubbles burst, like in 2008, we quickly shift from money being a depreciating asset (inflation), to money being an appreciating asset (deflation).

Maybe the world should have taken its deflationary lumps for a few years and muddled along without all the bailouts and free money. This is what happens when central banks are not independent of politics and work hand in hand with crazy politicos to try to avoid every economic downturn with more and more money printing.

It's best to let the cycles play out.

Sun, 02/20/2011 - 00:31 | Link to Comment zaknick
zaknick's picture

Famous last words.

Sat, 02/19/2011 - 17:33 | Link to Comment davepowers
davepowers's picture

"The fact that the banks - for whom most of this money represents a liability — now largely offset it on the asset side of their balance sheets by placing it with the Fed (in the form of excess reserves), rather than re-lending it to others, does NOT somehow cancel out the creation of this money, it simply suppresses the commercial banking sector's possibilities for further multiplying it via the traditional operation of the fractional reserve mechanism."

Is it possible that what is at work is BOTH the 'fiscal type' stimulus which Corrigan discusses AND the multiplier stimulus via fractional reserve lending? In other words, is it exactly true that the so called excess reserves that pile up as the FED and Treasury run QE are 'sterilized' or 'just sit there' at the FED?

There is a seemingly large market for the borrowing and loaning of bank reserves called the Fed Funds Market.

Is the Fed Funds Market provides a mechanism to 'unsterilize' excess bank reserves even as those reserves balloon passed $1.2 trillion? If so, this is a tremendous extra source of juicing speculation for stocks and commodities.

In the last two week, bank reserves have grown by almost $140 bn, as the FED paid for approx. $50 bn in QE 2 Treasury paper purchases, repaid $50 bn to the Treasury under the SFP, and cover about $63 bn in Treasury checks written for Govt. operations on the Treasuries checking acct at the FED.


Sun, 02/20/2011 - 14:40 | Link to Comment prophet_banker
prophet_banker's picture





[re-lending it to others]


this is against the law in fractional reserve banking to lend other's money; loans are newly created money; always.

Sat, 02/19/2011 - 18:24 | Link to Comment AUD
AUD's picture

A swap is just a fancy word for a loan. Money is still borrowed into existence whether it is the state doing the borrowing or not.

The difference is that government debt, particularly UST's are the most 'money good' of all the credit 'monies'. Thus they can issue debt as if it was money, but it is credit. When credit becomes money it's really called a bubble.

Sat, 02/19/2011 - 18:35 | Link to Comment pseanthebull
pseanthebull's picture

Thank you, oh thank you for putting this in plain english so even the fools who

actually worship the altar of asset swaps, and the crediting of accounts, can get it.

You, however, might have a problem convincing The Bernank, or CR over at TPC that this

is still money printing no matter how you look at it.

Ignor, er eh Arrogance is Bliss.


Sat, 02/19/2011 - 19:24 | Link to Comment Goldfinger
Goldfinger's picture

Heck, this is the whole point of Money Masters movie on how to get rid of national debt... So fed buying treasuries and interest going back to treasury is exactly that, it would seem. We have our gov finally printing it's own money at no cost... We have won people! And nobody had to get shot for it.... The bankers lose. Too bad they  were able to rob us blind first.

So yes it's new money at no interest. Celebrate bitchez. Our government will not go bankrupt. We are free! Or at least 50% free. QE to infinity is our new Greenbacks, then we just close the fed once this charade is obvious to all.

Well there's more, need to pay off the current bonds and kill fractional reserve. But QE is the fist step to saying good bye to the fraudulent national debt. Just watch the damn movie.... And tell me that's not the way to go..

 As mentioned above, too bad this money is not growing the economy.  If we spend it all on wars, then like greenbacks, it will take a wagon full of money to buy wagon of provisions... We'll still need to kill the fraudulant debt generating activities of the government.  And that would  require Egypt style turn over.

Sun, 02/20/2011 - 14:43 | Link to Comment prophet_banker
prophet_banker's picture



we must keep fractional reserve lending, because if we didn't; those with capital will borrow to those with out, with interest, and in a few generations, will own all capital and property; probably what tptb are seeking.   We need central banks, and Bill Still's point in the money masters is that we do not need them owned in private hands for profit.

Sat, 02/19/2011 - 19:00 | Link to Comment Dr. Porkchop
Dr. Porkchop's picture

I do asset swaps... paper for silver.

Sat, 02/19/2011 - 19:17 | Link to Comment Arrowflinger
Arrowflinger's picture

Mish knows this?

Sat, 02/19/2011 - 19:58 | Link to Comment EscapeKey
EscapeKey's picture

I haven't been to his site for months. Is he still going on about deflation?

Sun, 02/20/2011 - 09:15 | Link to Comment Snidley Whipsnae
Snidley Whipsnae's picture

Mish seems unusually quiet about deflation these days.

He is busy telling anyone who will read that 'two wrongs don't make a right'...

He is saying that just because the thieves on Wall St are getting away with their thievery that public unions should not do likewise...he has been ranting about public unions for months.

Meanwhile Denninger continues to rant that 'no one is being prosecuted for their misdeads'...meaning bankers/politicians/GSEs/blah, blah, blah

I seldom visit their sites these days... 

Sat, 02/19/2011 - 20:18 | Link to Comment newworldorder
newworldorder's picture

You know of course that the majority are truly lost. Not the ZH majority but the average non economist or financial type out there.

Its hard enough to understand asset class swaps, asking people to understand money asset swaps and fractional reserve banking is simply too much.


Sat, 02/19/2011 - 20:25 | Link to Comment jmc8888
jmc8888's picture

Wasn't that already implied? If not, then great he said it.

Sat, 02/19/2011 - 20:29 | Link to Comment eureka
eureka's picture

Spending/borrowing fiat into existence is intentional megalomania by unproductive banking, corporate and military elites and their beneficiary minion members - i.e. parasites and collectivist - the largest wellfare recepients on the planet. Fiat is empire or dreams thereof.

Sat, 02/19/2011 - 21:13 | Link to Comment disabledvet
disabledvet's picture

Way I see it "the banks have been on to it since day one."  They will not materially lend into this economy (as opposed to market in which they appear to be going hog wild in my view) as they did under Bush since the rule of "once bit twice shy" due to 2008 says "our existence still matters at the very least to us."  Government has done nothing to dissuade "them" from this fact.  More to the point "it pays to wait" in the form of an equity market that simply put takes all that debt monetization and in my view "calls the Bernank's bluff."  The equity guys have literally "not lost a hand" which if you simply look at the statistical laws of distribution "is not possible."  Statistics however can't take into account the ability of monetary authorities to feel like they can "change the rules by constantly changing the value of money to be worth something constantly less."  That's what gives "value" so to speak to the equity market's so called "perfection" in my view.  If you can predict the direction of the value of money (downward) then you can predict the value of equities (upward) provided "the right men are at the right helm of the right industries."  In short "hot money goes where it's treated most profitably" and that is without a doubt equity markets and in my view as a consequence we should be able to follow a general rise in prices paid if not even national bankruptcy by simply following the equity market and it's rise.  In other words i would argue "the rise in the equity market represents total wealth destruction" and not it's opposite as claimed by the powers that be.  But that's nothing new and this should be the last time any of us should feel a need to repeat what seems now patently obvious.  What's new you might ask?  It is in my view this explosion across the entirety of the Islamic world with acute emphasis on the Arabic speaking areas.  Needless to say "this area consumes a massive amount of Federal largesse" through the longest war in American history by any measure and in the end that is what in my view the Fed is in actuality and ONLY financing now.  I would call such a situation "a crisis" and i fail to see how it can be made better by "ramping up the war."  On the other hand I can understand and in fact believe in those who see the only solution now "ramping up the war effort."  Now excuse me while I join Dr. Evil in his Big Boy as we "ready to launch."

Sat, 02/19/2011 - 21:19 | Link to Comment topcallingtroll
topcallingtroll's picture

I have always thought if you are going to do qe it would be more fair to do it with tax credits for those very reasons. It advantages the wrong people otherwise. Helicopter money and allowing people to borrow at fed rates would also be more fair.

Sun, 02/20/2011 - 06:47 | Link to Comment celticgold
celticgold's picture

 slan go foil

Sun, 02/20/2011 - 12:04 | Link to Comment socalbeach
socalbeach's picture

excellent article, when are the price deflationists going to admit they were wrong?

Sun, 02/20/2011 - 12:44 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

I believe there is a complete breakdown in the transmission mechanism - credit is not forming true capital , the people who created the petrodollar system have created a elephant man type global economy where there has been massive malinvestment since the late 60s.

Imagine a America that remained on the pseudo gold standard - after it reached peak oil - to sustain itself it would have had to make investments in rail light goods / consumer traffic , reverse suburbanisation , continue with a nuclear programme etc etc - but it made a strategic decision that if it did not grab the Persian gulf someone else would.

So we are where we are - even though technically when congress creates the fiscal debt the rest of the world pays through their savings - that is no longer a sustainable postion.

Europe is very shaky and the middle east , well the middle east may be entering a reformation phase.

What struck me most about the response to the financial crisis is that the west refused to increase its capital base and is now completly addicted to credit which is a symbolic representation of fossil fuel BTUs.

We do need a huge infusion of credit for non oil dependent capital formation but the body politic appears too lazy and corpulent to engage - therefore the only solution is to dramatically increase the price of gold to stop this massive capital strike in the western world.

There is no other way as I see it - but i do coincide the dollar may survive if it burns the rest of the planet in a dramatic super 1980s decaptilisation experiment.

Sun, 02/20/2011 - 13:22 | Link to Comment bunkermeatheadp...
bunkermeatheadprogeny's picture

ZHers get it. The market gets it.  The only econs to the contrary are turd polishers.

Sun, 02/20/2011 - 13:37 | Link to Comment poydras
poydras's picture

No need to unnecessarily complicate the topic.  Consolidating the government and Fed accounting, the government is simply crediting bank accounts by expanding the money supply.

The monetary base more than doubled in the past two years.  You can generate all sorts of hoccus poccus to describe the situation.  If you conclude that the Fed is able to shrink the base to the long run devaluation average, then the realized future inflation is likely to be consistent.  Anyone concluding that the Fed is unable to materially shrink the base essentially is expecting a significant inflation increase.


Sun, 02/20/2011 - 14:56 | Link to Comment prophet_banker
prophet_banker's picture;_ylt=AkcWctF9.mQIv5cqFIYBoFObvZx4?p=shrin...


and for a chart


derivatives ballooning to 1,600 billion doesn't equate to "money supply" for the rest of us

Sun, 02/20/2011 - 14:04 | Link to Comment prophet_banker
prophet_banker's picture

[the government spends money it does not have into existence]



this is innaccurate, and misleading, the government doesn't create money, banks do, and this needs to change.

Mon, 02/21/2011 - 10:39 | Link to Comment jailnotbail
jailnotbail's picture

I'm no economist, and I certainly don't want to defend the fed, but when the federal government spends money isn't that considered fiscal policy? Whether it's a valid distinction or not, I learned that was distinct from monetary policy, which is when the fed produces money by buying treasuries.  The point is that any effects that derive from the govt spending don't seem properly attributed to the fed, in the traditional analysis. As a practical matter the distinction between the fed and the govt may be as meaningless as the distinction between the govt and the big banks. They're really all one big undifferentiated metastizing tumor on civilization, sucking essential nutrients and life force from the productive real economy, but perhaps that qualification should be established before aggregating their individual actions.

Similarly, in fed speak, it seems to me that Bernanke is engaging in an "asset swap", but the assets are not necessarily equivalent in liquidity, or some other characterisitic which someone more informed than I may be able to name.  A Treasury bill is an asset. And a demand deposit is an asset. So if I buy your Treasury bill by putting a deposit in your bank account isn't that an asset swap? Now it may be that the demand deposit burns a hole in your pocket a lot faster because it's a lot easier to use to put up margin on a commodity contract than a treasury bill. I don't know, but since the Treasury forces one to stay invested in U.S. dollars until it's sold, and assume all the concomitant risk (interest rate, fx) while cash is instantly transformable to hard assets, it seems like the cash might be more liquid.


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