Guest Post: Six Charts On Money, Oil, And Credit

Tyler Durden's picture


Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Six charts tell the story of financialization and the diminishing returns of credit.

Today I present a story in six charts. Entire books could be written about the complex interactions of money, oil and credit, but let's try to keep the story as simple as possible.

Here is the monetary base of the U.S. Notice the big ramp-up as the Federal Reserve responded to the global financial crisis with a flood of liquidity/expansion of base money supply.


Here is base money and the price of oil in U.S. dollars. Not a perfect correlation, as there are many inputs to the price of oil (geopolitics, currency fluctuations, etc.) but the correlation is still significant: when base money goes up, so does the price of oil.


Meanwhile, oil exports have topped out. Oil exporters are using more of their oil domestically, leaving less to export. This raises the specter of an imbalance of demand-supply, i.e. insufficient supply to meet demand. In that case, prices rise.


Bank credit has skyrocketed. Plenty of credit sloshing around the system. This curve looks exponential, i.e. unsustainable.


But ample credit doesn't necessarily lead to growth (as measured by gross domestic product). Here we see the diminishing returns of credit: credit soared from 1990 to 2008, while GDP growth drifted lower.


Bank assets have risen exponentially along with credit.


Bank assets have risen along with credit: this reflects the financialization of the U.S. economy. But a funny thing happens when oil supply tops out and base money expansion drives oil higher when priced in U.S. dollars: when the cost of oil rises, the economy stalls out.

Expanding base money pushes the price of oil up to stall speed, while expanding credit has a diminishing effect on the real economy. It does however handsomely boost bank assets.

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Wed, 10/03/2012 - 11:14 | 2851895 spastic_colon
spastic_colon's picture

you spelled "sharts" wrong

Wed, 10/03/2012 - 11:31 | 2851943 slaughterer
slaughterer's picture


Wed, 10/03/2012 - 11:37 | 2851951 Dalago
Dalago's picture

Tyler, Charles Hugh-Smith forgot guns sales.

Wed, 10/03/2012 - 11:15 | 2851896 LULZBank
LULZBank's picture

What happened to those "one chart explains all" thingamajigs?

Wed, 10/03/2012 - 11:28 | 2851925 hedgeless_horseman
hedgeless_horseman's picture



What happened to those "one chart explains all" thingamajigs?

Here is one you may want to laminate for future use...

Wed, 10/03/2012 - 11:32 | 2851944 LULZBank
LULZBank's picture

Is it how to effectively catch the most Dollahs being thrown out by Bennycopter?

Its still 2 charts! :D

Wed, 10/03/2012 - 11:53 | 2851981 hedgeless_horseman
hedgeless_horseman's picture



Its still 2 charts!

Double sided with a shooter side and a spotter side, but still the same low, low, price!

Distance lends enchantment to the view.

Wed, 10/03/2012 - 11:54 | 2852009 LULZBank
LULZBank's picture

Im a peaceful guy, I would know nothing about these ;)

Great work, Thank you!

Wed, 10/03/2012 - 11:41 | 2851966 Zadok
Zadok's picture

Nice one HH!

What more needs to be said, that pretty much covers it all in two charts.

Wed, 10/03/2012 - 12:48 | 2852196 Stud Duck
Stud Duck's picture

Hedgeless, do you have the same for 8mm Mauser??? My original Hiemsoth scope works well but a chart would be endlessly useful!

Thanks for you great posts!

Wed, 10/03/2012 - 11:18 | 2851898 LawsofPhysics
LawsofPhysics's picture

So world demand is there, but the energy to maintain a decent quality of life for 7+ billion liabilities isn't.

No worries, good businesses and good business models know how to properly allocate capital and resources.

Wait what?  we have been bailing out the BAD business models and crooks?

What's that?  we also destroyed the mechanism for true PRICE DISCOVERY?

Oh crap, moral hazard is a bitch.

Wed, 10/03/2012 - 11:22 | 2851908 CPL
CPL's picture

Sucks, but they've got infinite muny (like funny) and a huge bag of bad ideas to try watching someone hammering a square peg through a round hole and expecting results.

Wed, 10/03/2012 - 11:24 | 2851913 El Viejo
El Viejo's picture

In poor countries they have as many children as they can to support the parents in their old age. In the western world they take a different approach. They abort the next generation and rely instead on financial schemes.

Yep moral hazzard!

Wed, 10/03/2012 - 11:26 | 2851921 LawsofPhysics
LawsofPhysics's picture

yep, and in the end everybody loses.

(except all the paper-pushers of course).

Wed, 10/03/2012 - 11:41 | 2851962 Dr. Richard Head
Dr. Richard Head's picture

Looks like US efforts to destablize the Iranian currency are working out fine, just fine -

Wed, 10/03/2012 - 11:50 | 2851986 LawsofPhysics
LawsofPhysics's picture

the real question is whether or not Iran's trading partners give a shit and whether or not Iran starts directly trading with them and avoiding the dollar.  yes, they have pain now, but who recovers later?  What is your timeline for success?  a day a week, 20+ years?  Keep holding on to those paper promises I am sure they will be worth something in the future.

Wed, 10/03/2012 - 11:32 | 2851933 centerline
centerline's picture

Both systems built on perpetual growth.  At least with financial schemes the complicit are at some point sacrificed... in the childbearing scheme, more innocent are lead to slaughter.

Wed, 10/03/2012 - 13:50 | 2852436 Drachma
Drachma's picture

That is an unproven assumption and extremely simplistic argument. The dynamics of population growth are much more complicated than you imply. Simple Malthusian equations have no place in the real world, where complex social and biological feedback mechanisms work to keep populations in check, without the resort to mass culling and misery, that is, if central-planners are kept out of the equation. By the way, child-bearing is not a 'scheme' as you categorize it; it is the way of things. And it is a most beautiful and fulfilling way to knowledge and truth. Cheers.

Wed, 10/03/2012 - 11:27 | 2851926 centerline
centerline's picture

You've been on fire lately LoP.  Keep it up.  What is unsustainable won't be (cannot be) sustained.  

Wed, 10/03/2012 - 11:20 | 2851907 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

In the game of Real vs Unicorns, Unicorns always win.


So go eat your dollars.

Wed, 10/03/2012 - 11:30 | 2851934 Coldsun
Coldsun's picture

Lincolns taste the best. But I'm a bit of a foodie so others' tastes may vary.

Wed, 10/03/2012 - 11:25 | 2851915 LawsofPhysics
LawsofPhysics's picture

"Bank assets have risen along with credit: this reflects the direct monetization of the U.S. economy. "



Wed, 10/03/2012 - 11:37 | 2851953 slaughterer
slaughterer's picture

Let's all buy JACK since the 27-year-old junior analyst who pitched it at "Value" congress was so cute.  

Wed, 10/03/2012 - 11:39 | 2851959 LawsofPhysics
LawsofPhysics's picture

any thoughts on that spike in NFLX slaughterer?

"free" markets at work?

Wed, 10/03/2012 - 11:44 | 2851968 slaughterer
slaughterer's picture

I was 10x leveraged NFLX going into that CITI-inspired spike.  NFLX PT $120 FROM NOW ON.  LAZARUS followed up with an even higher PT.  NFLX: the stock for Q4.    

Wed, 10/03/2012 - 11:41 | 2851965 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Let's all buy silver so we can take back the money supply from the bankster class and have some semblence of our rights.

Wed, 10/03/2012 - 11:46 | 2851971 slaughterer
slaughterer's picture

I am schocked, let me say schocked thaty AAPL is trading at the demonic strange attractor level of 666.66  after rumors of mini iPad were leaked this morning.  AAPL should be $1001 on this rumor!

Wed, 10/03/2012 - 11:46 | 2851972 buzzsaw99
buzzsaw99's picture

shocking that the fed (INFINITE PIGGY BANK) only benefits the banks. [/sarc]

Wed, 10/03/2012 - 11:46 | 2851975 slaughterer
slaughterer's picture

OMG, even my FAS calls dripping with pearl jam today!   Thank you BEN!

Wed, 10/03/2012 - 11:55 | 2852017 Meesohaawnee
Meesohaawnee's picture

DTO bitchez

Wed, 10/03/2012 - 12:04 | 2852045 Quinvarius
Quinvarius's picture

An exponential bank credit supply chart is sustainable.  To say it isn't is to say you can't count to 1 to 100 and not go back to 50.  It has no natural forces countering it in a fiat system. 

Wed, 10/03/2012 - 12:09 | 2852057 paradism_
paradism_'s picture

Peak humanity.


Wed, 10/03/2012 - 12:18 | 2852093 LawsofPhysics
LawsofPhysics's picture

Call Dr. Krugman, looks like there is plenty of demand for real goods and services, no need to break windows. Now just "print" up some resources.

Wed, 10/03/2012 - 12:12 | 2852067 Monk
Monk's picture

What's left to do is to connect all of the charts to the third, and to see that chart in light of peak oil.


Wed, 10/03/2012 - 12:14 | 2852076 Quinvarius
Quinvarius's picture

I will give 90% odds that they are going to spring a margin raise in oil tonight just by looking at the oil charts today.  Expect gasoline to shoot the moon as refiners get their hedges destroyed again.

Wed, 10/03/2012 - 13:27 | 2852325 mnzcme
mnzcme's picture

Needed an additional chart: Velocity of Money (from St Louis Fed).  It has cratered...

Same church.  Different pew.

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