IceCap Asset Management: Three Days That Shook The World, And The Law Of Diminishing Returns

Tyler Durden's picture

From Keith Dicker of Ice Cap Asset Management

Three Days That Shook The World

The Law Of Diminishing Returns

While there are plenty of complex laws to keep lawyers happily billing forever, there is one law that is very simple and is never mentioned by those responsible for the good health of our global economy - the law of diminishing returns.

This un-billable law becomes a nightmare for anyone trying to produce more of anything. It occurs when despite putting increasingly more effort into an activity, the desired outcome becomes less and less rewarding.

Case in point, one just has to consider America’s growth of borrowed money and the resulting growth in GDP over the last 50 years.

Chart 1 shows that in the 1950s, America had to borrow just $1.36 to grow their economy by 1 extra dollar. That’s not so bad until you  consider that over the next 50 years America had to borrow more and more to produce less and less GDP. In fact, during the 2000s America had to borrow $5.76 to grow its economy by an extra buck – that’s progress.

Now, we’re sure that over the years all of this borrowed money was put to great use. After all, the future never comes so why worry about it. Unfortunately, the future is today and the “credit cliff” is quite steep (see chart 2). The debt reaper is knocking on the door and he wants his money back. There’s just one minor problem – no one has the money to repay him.

No problem, the central banks & governments have plenty of money tools available to beat back any financial challenges presented by the debt reaper.

To make you feel more uncomfortable, let’s review the tricks in their money bag:

Money tool # 1 = deficit spending. For years, the G7 countries have believed that spending more than you make, will create jobs and prosperity. To measure the success of this strategy, we invite you to hang out in Spain, Greece or Italy.

Money tool # 2 = cut interest rates to 0%. All the really smart people in the World know that lower interest rates encourage people and companies to borrow more money and spend this money. To measure the success of this strategy, we invite you to hang out at the US Federal Reserve and help them count the $1.5 trillion in excess money held by the big banks.

Money tool # 3 = when all else fails print money. Everyone knows by now the reason the Great Depression was great was because no one had the idea to print money to kick start the economy. To measure the success of this strategy, we definitely do not invite you to visit Japan. The Japanese have been printing money for over 10 years and that hasn’t shaken their economy from its funk one bit.

As we enter the always dangerous months of September and October, central bankers and governments just can’t get their heads around the fact that their cherished money tools are not shaking the World. Never one to quit, someone somewhere muttered “we must do something” – and something they did.

Day 1 – September 6, 2012

Up to this point, the European Central Bank (ECB) has provided over EUR 1 trillion in bailouts to banks and countries with two separate Long Term Refinancing Operation (LTRO) schemes. It was thought that these two initial financial bazookas would be enough to restore confidence, but it wasn’t.

Investors became bored with Greece and its 25th final bailout and now all the attention was turning to Spain. The rapid decline in Spain’s real estate market was causing an even rapider decline in the health of Spanish banks. In fear of losing their life savings, people and companies were yanking billions of deposits out of the country.

This bank run was serious stuff. So serious that investors began refusing to lend not only to the banks but to the Spanish government itself. And if Spain wasn’t bad enough, Italy has the potential to be even worse. Yes, the dreaded contagion had started again and this time the hats had seemingly run out of rabbits.

And then it happened. The ECB announced that they would provide unlimited amounts of Euros to any European country that required a bailout. But – because this is Europe, there was a small catch. Any country who wanted the money had to first formally apply.

While this may sound a lot like “pretty please” it isn’t. Unsurprisingly, Germans are growing tired of using their money to bailout it’s southern European friends. Reluctantly, the Germans agreed to this latest save Europe scheme but only if the bailout contained conditions. Now, you can’t really blame Germany for this requirement. After all, it was only a year earlier when Italy pulled the old switcheroo and reneged on its promise to raise their retirement age after receiving bailout money from Germany. Lesson learned.

On hearing that the ECB would provide unlimited amounts of money

over an unspecified time, markets naturally soared on the news. Hey – it’s free money! How could you not like this?

While you would assume this conditionality clause would be deemed fair everywhere else in the World – not so in Europe. Naturally, the Spanish and Italians have a beef – they were under the impression that money is always free, never wrapped tightly with any kind of strings.
Now the World patiently awaits for the Spanish to formally request a bailout, yet the Spanish have an entirely different plan and that plan involves anything to keep Brussels and the IMF away from Madrid.

The Spanish government’s fear (which will soon become reality) is that as soon as these non-Spanish accountants and bureaucrats discover how bad the finances really are, someone might actually lose their job, government car and government expense account.

The irony of course, is that the mere announcement of the ECB’s unlimited money for an unlimited time scheme has had the effect of pushing Spain (and Italy’s) cost of borrowing down. No money or conditions have changed hands, yet markets are reacting as if it already has.

This brings us to a stalemate - as long as Spain’s cost of financing remains low, it will not formally request a bailout. However, we ask you not to fret and frown. As soon as Spanish interest rates shoot up again and thousands of protesters march in Madrid and Barcelona, Mr. Rajoy and his government will be forced to raise the white flag.

What isn’t known just yet, is what happens once the rest of the World discovers how bad Spain’s finances really are. And of course, bailouts aside – none of these money tricks will have any impact on economic growth or job creation.

Nevertheless, everyone in Europe slept well that night – at least for another six days anyway.

Day 2 – September 12, 2012

It was all fine and dandy for the ECB to announce six days earlier that they would provide unlimited money to anyone who formally requests a bailout from Brussels. The ECB however, forgot to mention just one itty bitty tiny detail called Germany.

After three years, the German public have started to become increasingly uncomfortable with giving their money away to Greece, Ireland and Portugal. As one would expect, eventually politicians hear their common man and actually exercise their duty of representation by government.
In effect, the German “no more bailout” snowball has started to roll and its first encounter is the question of whether Germany can legally participate in the European bailout fund – the ESM. While the Law of Diminishing Returns racks up zero billable hours for lawyers, German
lawyers had a field day with the legality behind the ESM issue. The decision would be decided by the German high court and a ruling against the legality of the ESM bailout fund would effectively end the whole Euro experiment once and for all.

When the announcement hit the news wires, the result was unsurprisingly “for” the ESM bailout fund (whew!) yet the decision also came with a twist, similar to the twisted twist delivered by the ECB a few days earlier.

While the German high court stated that the ESM was not against the German constitution, it did set a cap on the maximum amount Germany would contribute to the fund – EUR 190 billion.

This cap can be increased, but only if agreed to by a vote in the German parliament. And considering the taste for additional bailouts is not exactly being embraced by the voting population, this is a significant caveat.

The significance behind this “capped” amount cannot be overstated, and it is only a matter of time before the French catch on to the fact that they’ve just been hoodwinked by the Germans.

With Germany now capping their ESM bailout liabilities at EUR 190 billion, the question must now be asked “who picks up the slack?”
Unfortunately for the French, they have no idea what just happened.

While the good bankers in La Défense are cheering the latest run up in stock prices, the rest of the French population are about to be baguetted in the side of the head.

Considering that France just decreased the retirement age, increased minimum wages while slapping a 75% tax on anyone earning greater than EUR 1 million, the likelihood of it eliminating its fiscal deficit and then reducing its debt are slim and none. Yet, with Germany now drawing a line in the bailout sand, France’s commitments have suddenly increased significantly.

The ESM bailout fund is structured so that if a country requests a bailout it no longer has to accept its share of liabilities. Considering this entire charade is being orchestrated to bailout Spain and then Italy – it directly results in France having to pick-up the tab not being absorbed by Germany.

The numbers are staggering to say the least. Frances’s ESM liability increases from EUR 143 billion to EUR 226 billion. From another perspective, France’s ESM commitment will soon equal over 44% of the government’s tax revenues for the year.

While today, everyone in France is talking about Germany we’re quite confident that at some point soon, everyone in France will be talking about France.

Day 3 – September 13, 2012

With the Europeans clearly taking the lead in shaking the World, you knew it was only a matter of time before the Americans would take note. And why not – America continues to have the World’s largest economy, the World’s largest debt burden and the World’s largest money printing machine.

Since telegraphing its newest money printing intentions from Jackson Hole a few weeks earlier, the only surprise available from Ben Bernanke and the US Federal Reserve was how much money they would print. Guesstimates ranged from $250 billion up to $700 billion. No matter what happened, bankers everywhere had Bollinger Champaign sitting on ice.

Never one to disappoint, Mr. Bernanke’s announcement to print $40 billion a month until eternity was too much for even the talking heads to comprehend. America has now committed to printing money forever – or at least until the job market improves.

This new approach by the Federal Reserve is interesting on several levels. First, previous goals of printing money was to bolster the housing market. It was believed that fixing the housing market would boost the economy out of its slump and save the day. Well, today millions of homes remain worth less than their mortgage and millions more sit in the shadows waiting to be sold. The only bolstering that happened was of the big banks’ bank accounts.

But that’s ok. The Federal Reserve had another trick up its sleeve. Instead of targeting the housing market, it would instead target “wealth creation.”

“Wealth creation” is another academic, economic, and prehistoric belief that if everyone was wealthier, they would spend more money. And as we have all been told, spending your money is a guaranteed way to prosper. Unfortunately for the Federal Reserve, the old wealth creation thingy hasn’t quite worked out either.

And with two strikes in the count, there was nothing left for Ben Bernanke and the US Federal Reserve to do except close their eyes and swing for the fences. And swing they did and they will keep on swinging until something, anything, happens.

Well, one thing is for sure – something will happen.

As for what, we have little confidence it will involve a rebound in the economy or a rebound in new jobs – you need “real” not “manufactured” prosperity for this to happen.

What will happen, will be a continued widening in the rift between financial markets and the economy.

There is little doubt this new edition of money printing American style will bolster financial markets, the fact remains that the real economy in the US, Europe and Japan will not begin to recover until the central banks and the governments simply allow bad debt to be written off. At this rate, don’t hold your breath as the bad debt scenario will not be allowed to happen anytime soon.

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Yen Cross's picture

If anyone wants to learn more about "divergence" in ,(common time frame) yields? Look @ Chart #1 {debt/GDP}.

  That explains the " Law of Deminishing returns", perfectly. Albeit I call it "purchasing power" , based on demand for a "sovereign entities" credit worthiness.  In any case, Tyler lays it out for +1 style!

flacon's picture

"allow bad debt to be written off"


...and since money IS debt, that means writing off 'money' and since that means writing off 'Federal Reserve Notes' it will NEVER be allowed to happen, until we all drown in 'money'.


"I have abandoned Free Market principles in order to save the 'free market' system (READ: FEDERAL RESERVE SYSTEM)" - George Bush. 

hmmtellmemore's picture

"... the US, Europe and Japan will not begin to recover until the central banks and the governments simply allow bad debt to be written off"


Define "recover".  Does recovery mean that we forgive bad debt and renew this endless cycle of national overspending and impoverishment?

No thanks.  Let each nation get branded with shame so the people won't forget their stupidity.  Force the Greeks to sell the Acropolis, and let them buy it back when they are out of debt.  I hope the creditors of the US federal government demand and get a national landmark.  I hope we have to sell the Statue of Liberty, so we cannot forget that we've sacrificed our children's liberty with our spendthrift ways.  That valuable wisdom would serve us very well for generations.


Bananamerican's picture

(I hope we have to sell the Statue of Liberty, so we cannot forget)

Premier Wen?

Is the Yu?

Can't we just sell you our banks?

kridkrid's picture

Yup. Trying to have a conversation about our current state of economic affairs with someone who can't grasp this is pointless. It's not complicated and I think I've become pretty good at explaining it, but I'm batting about .150.

Bananamerican's picture

send 'em this article...

it's written in "citizen" and easy to follow

JohnKozac's picture

The CB's give the word, "unlimited" new meaning.

prains's picture

limited only by "trigger event"

stocktivity's picture

I think it was Chuck Shumer who told Bernanke and the Fed to "Get to Work".

flacon's picture

Yes it was Chuckie Shmucker. 

Al Gorerhythm's picture


"Never one to quit, someone somewhere muttered “we must do something” – and something they did."

That would have been Kevin Rudd, ex P.M. of Australia and his thouroughly incompetent yet equally lucky (having China as a customer for raw materials) Wayne Swan. 

Rudd was seen on TV, musing rethorically but with a large helping of false concern about the budget, "What to do. What to do?"

Wayne replied: We've got to do something. We can't just do nothing."

The money supply was increased exponenentially.

That has been typical of the behaviour of politicians world over. Welcome to the aftermath.



max2205's picture

Just like Graham Summers but with numbers. And no wolf crying

Good read. Thanks

Yen Cross's picture

 • (Money tool)#3 , The Japanese have been printing money for 10 years?  Wrong!


 The,Japanese started printing (¥) back in the late 80's.   They lost their shorts in the early 90's(U.S.) R/E crunch, and have monitized ever since!

  I'll bet a sizeable amount of those Japanese  " Yakuza", deals are still weighting the "MoF & BoJ" & KAMPO" down!

monopoly's picture

That was an excellent assessment of where we are and where we are going. You just cannot short this market.....yet.

Dr.Engineer's picture

I like this summary.  Hit the high points.

We're just f*cked.

Waterfallsparkles's picture

Problem with QE3 to infinity is that now they cannot pump the Market on the HOPE that the Fed will ease.

Waterfallsparkles's picture

The other problem is that everyone is Long.  There are no Shorts in the Market to cushin a downturn.

economicfreefall's picture

Not the case in the gold and silver stock sector. Lots of shorts and in many cases companies have between 10-20% of their outstanding shares sold short. -free portfolio tracker and analysis of gold and silver stocks

Yen Cross's picture

 Hey " gravity boy"?  Ever heard of "long covering"?

insanelysane's picture

As Krugger would say, they just haven't printed enough to make a difference.  On CNBS they were all excited on Friday, $40B per month forever of free money if you have the right connections and something to sell.  

I have a couple of steel sheds in the Far East full of precious metals.  I have some paperwork to prove it, signed by Jon Corzine.

Dareconomics's picture

Spain is in a lot of trouble:

It wouldn't surprise me if the true state of their finances is worse than what I found. 

trebuchet's picture

Dare estimates 58% unfunded but also doesnt add back Eu bank bailout....does that take it to 86%???

 Spanish funding needs covered  /sarc

chart_gazer's picture

this is noise.  one journal entry from the fed will take care of this in a nano second. they are accomplishing their goals, ddrive in fear to make you cave to their wants.

whatever is needed will be provided. the global central banker club will back door anything necessary. germany will  cave, it is all a show.

the people whom you are trying to read will not let the minutia you are looking at get in their way.

regionswork's picture

Borrowed money does not always lead to productivity gains because it is not invested in productive assets. Money has been increasingly borrowed for non productive assets, like fancy cars, second homes and electronic toys, or immediate consumption, like vacations, food and drink. All debt does not have a balancing asset. Easy credit/debt can bid up asset values for a while, like housing, but then - poof - reality hits. 

So, no suprise really that increasing debt is only making things worse. The new debt is even less productive. 

Nobody For President's picture

And much soverign debt is used to roll over old debt - violating the old "If you are in a hole, stop digging" rule.

Sort of the utltimate non-productive debt, and a way of life in 'modern' economies. I boggles my tiny little mind to think a bunch of PhDs apparently believe this is going to end well - or never end at all. I should knock off reading Michael Grant (History of Rome).

Ignorance is bliss's picture

written off Debt..bad or otherwise is someone else's asset.... To suggest writing off debt means someone else will loose out. Perhaps payers.

chart_gazer's picture

no so.  i contend the fed strategy that everyone is missing is exactly this.  get all the debt of the US on their balance sheet, then tell the US you owe me nothing.  the debt was acquired with newly printed money, that money has been passed through the banks to the government and spent. the bonds that the fed holds are just paper, it is no loss to them to just trash them.  when everyone finally realizes the feds balance sheet means nothing they will be able to understand what is going on.

Yen Cross's picture

The Europeans "never"write down debt. If that was the case, then every " Family Feud", would have been forgiven centuries ago!

 Why in the hell do ya think everyone thinks a "European Union" with a common currency, is such a jokE?

 Deutchmarks are still a preferred currency, even though the F/X templates are taken down!

WhiteNight123129's picture

What rubbish.... check the monetary aggregates of Japan does it look like M1 Index <GO>. ?

And please read balance sheet recession from Koo before talking and check the Japanese answer on printing money...Japan was a debt transfer experiment.


Get out of way bondholders, or we are having you for diner...The Fed intent is not to have anyone re-lever but to have monied capital melt back into circulation... bullion into coins or large deposits into spending....dull post.



toomanyfakeconservatives's picture

This article helps make it clear... either the MASS ARRESTS of the traitors and perpetrators takes place, or Americans are going back to a colonial-age standard of living.

dvduval's picture

#4 Reduce taxes again so we can get a "sugar rush" and for a short time basque in the cult of Reagan bliss before we wake up and realize it is not working like we planned. 

Grand Supercycle's picture


Due to recent central bank intervention and short covering spikes, these daily charts are extremely overextended and significant correction expected very soon:


falak pema's picture

Yes, the three days that pushed the financial kabal over the brink; well said. 

Heroic Couplet's picture

Yeah, we learn that 49 states don't have a Wall Street, so why does New York State need one? Shut Wall Street down. The finance sector is a utility, with salaries capped at 2 times the poverty rate. Any who works in the remodeled finance sector is banned from trading anywhere in the world, on any stock exchange. They can play gin rummy for match sticks.

Limit New York City to credit unions only for the next century. Close the Cayman Island accounts, confiscate them or hack them out of existence.

BlackVoid's picture

The goal is not to restart the economy (which is imposibble anyway due to resource constraints), but to save the big banks. Same for Japan.

Money printing is a stunning success in this light.

Quinvarius's picture

It is funny that people actually believe bankers and politicians that money printing and deficit spending can pull the economy out of a recession/depression.  They are lying because they need more money that doesn't exist.   The politicans and bankers doublespeak people into believing they are helping them.  I promise you, removing the purchasing power of the public by devaluing the money does nothing good for the economy.  That is how great depressions happen.

billwilson's picture

Uhm .... Canada is a member of the G7. For about 15 years in a row, contrary to other G7 nations, it ran federal government surpluses. You know, Keynesian policies (save in good times so as to run deficits in bad).

Canada has not yet resorted to money printing. Its banks remain stable because they are not allowed to take risks like in other nations.


While not perfect by a long stretch, Canada shows that QE to infinity is not the only solution.

AVFMS's picture

As usual, a great, fun to read and to the point analysis of IceCap. Always a worthwhile read. Thx

Remington IV's picture

Or we can do nothing ... which we're really good at