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Anatomy Of The End Game, Part 2: Variations On The Problem

Tyler Durden's picture


Authored by Martin Sibileau of A View From The Trenches blog,

“…Just like since the beginning of the 17th century almost every serious intellectual advance had to begin with an attack on some Aristotelian doctrine, I fear that in the 21st century, we too will have to begin attacking anything supporting the belief that the issuer of the world’s reserve currency cannot default, if we are ever to free ourselves from this sad state of affairs…”

The intention today was to do a revision of what I had expected in 2012, what happened and what I think will happen. However, we may have to put this aside one more time, given the feedback received on the last post, titled “Anatomy of the End Game”. I seem to have been misinterpreted and to clarify this very important topic, I present a second part to make absolutely clear that:

  1. It is misguided to believe that the end game should be blamed on the shadow banking system. Should regulators succeed in leaving regulated banks the role of funding the commodities and futures markets, the end game would not be avoided and its violence would be even greater,
  2. Fiscal austerity in the US, if my assumptions (clearly laid out in the previous post) apply, would be irrelevant unless it produces a sizable fiscal surplus,
  3. The approach taken by policy makers addressing this logical outcome (which they mistakenly call tail risk –the tail risk is the reverse: That the game does not end-) is wrong.

The End Game in a world without shadow banking

There are continuous attempts at further regulating money market funds and central counterparties (i.e. clearinghouses), based on the belief that their operations entail risk of a systemic nature. But the systemic nature of the risk is simply due to the leverage built upon the collateral that these players use to provide funding. There is nothing particularly intrinsic to either the players, the markets that use that collateral or the collateral (i.e. sovereign debt, mortgages, etc.) itself, to make them “systemic”. To coerce these players to increase their capitalization or to prevent them from freely disposing of their liquidity as risk varies only increases costs and volatility.

Let’s assume the extreme case where the “shadow banking” sector disappears and banks become the sole providers of funding in the repo market. The figure below describes the situation.

In stage 1, we can see the consolidated balance sheets of the financial institutions, traders, and non-financial institutions (private sector). Traders have US Treasuries as assets, which in stage 2, they sell to source cash. This cash is expressed as deposits (in stage 2), which are liability of the financial institutions. Deposits then, are backed by US Treasuries. When these are repudiated (our main assumption) the sustainability of the financial institutions is challenged, precisely at the same time that traders may be suffering a short squeeze on short commodities positions and margins are called. This short squeeze would also affect the commodities and futures markets’ clearinghouses (not shown in the figure). From stage 3, it is easy to see that depositors (non-financial institutions) who are not part of the aggregate “traders” class are the ones who are most at risk. The faith in the US dollar system is lost and a run on the banks is triggered.

We must clarify that the US dollar zone/system is not bound by geographical or jurisdictional borders. A Hong Kong or Brazil based bank that relied on US dollar funding to generate relevant net interest income would be equally affected by the liquidity squeeze, as so many European banks learned in 2008 and 2011.


Under this scenario, and unlike the case where the shadow banking system funds the repo market, the Fed would not have the luxury of choosing whether or not to intervene. It would simply be their duty to do so, and they may believe that they have the option to purchase the US Treasuries from the banks with or without sterilization. But in the end, it would not matter…sadly. Let’s go through the process:

a)      The Fed purchases US treasuries without sterilization

This is the easiest option to understand. As the figure shows below, the Fed purchases US Treasuries from the financial institutions and their reserves grow. As the whole context in which this would occur is not positive for economic growth, to say the least, and the private sector delevers: Loans outstanding, on a net basis, decrease. Deposits decrease and the non-financial private sector increases cash on hand. The equity of the financial sector, naturally, suffers. This cash on hand will keep rising as long as the US debt remains repudiated and US Treasuries need to be monetized by the Fed. Eventually, in the absence of alternative investments (as in the current context, with zero to negative interest rates), the cash is simply spent on consumption. In an environment of financial repression, where companies use whatever liquidity preferably to distribute back to owners via share buybacks or dividends (as we expected back in March), the higher consumption facing lower production ends up driving prices higher.

b)      The Fed purchases US treasuries with sterilization

If the Fed decided to sterilize the purchase of US Treasuries being repudiated, the market would immediately begin to discriminate between those banks who get the benefit of carrying Fed debt and those who don’t. This is similar to what we see in the Eurozone: Deposits flee banks which are seen at risk of being caught on the wrong side of the tracks, should a break up of the Euro zone occur, to banks in the core of the Euro zone (i.e. banks with continuous access to liquidity lines of the European Central Bank). This arbitrage (why carry cash, which pays no interest, rather than Fed debt?) would drive all banks to buy distressed US Treasuries to make a difference exchanging them for Fed debt. This would be a very perverse process, because banks would drive deposit rates higher to maximize the sourcing of US Treasuries.

At this point, I am aware you may be confused: It doesn’t seem to make sense to first assume that Treasuries are being repudiated and later say that banks seek to raise deposits to purchase them. But this makes perfect sense, when we realize that in this context, the market for US Treasuries would be simply broken, segmented. Only banks with the privilege of access to the Fed’s window would be interested in US Treasuries, because only they would have access to the interest-paying debt of the Fed. The US Treasuries, effectively, would be marked to model by the Fed and as the private sector gets crowded out and deposits drop, the need for liquidity and profitability of the financial institutions would demand that higher interest be paid by the Fed on its debt.

You may ask why should the Fed be forced to pay higher rates, when the private sector would seem to be out of investment alternatives. First, we must remember that in this context, commodity prices would be rising and the nominal rate of return in gold would be a benchmark, just like simply holding US dollars in the ‘80s was a benchmark shaping inflation expectations in Latin America. Secondly, the Fed would be forced to pay higher rates to keep deposits from dropping in a context of decreasing trust in the solvency of the banking system. Those living today in the periphery of the Euro zone understand this. Why should deposits not drop? Because if they do, more currency will be circulating and available to buy real assets (i.e. gold) and the outstanding stocks of US Treasuries being repudiated would not be cleared from the market into the balance sheet of the Fed. Their increasing yield (as the price drops) would be a price signal to the market that the Fed would have every reason to kill.


However, if the value of the US Treasuries falls and the interest the Fed has to pay to sterilize their purchase rises, the Fed will face a net interest loss. The Fed may chose to keep accumulating these losses or may also decide to simply convert its debt in legal tender, to end the arbitrage between currency (not paying interest) and its interest-paying debt. In the first case, we end up with a plain monetization of US Treasuries, which we just analyzed above. The second case (enforcing Fed debt as legal tender) would truly mark the end of the game in terms that would make historians of the 21st century would devote entire volumes…

Why fiscal austerity would be irrelevant without a surplus

A logical outcome, which I think is clear from the two scenarios above, is that no matter how far the spending cuts go, the only way to compensate for the monetization of EXISTING INVENTORY of US Treasuries, is to reach a fiscal SURPLUS. Being only frugal won’t cut it!

In order to avoid being dragged to double digit inflation, there will have to be a fiscal surplus to offset the quasi fiscal deficit of the Fed. However, the implementation of austerity measures (i.e. spending cuts), will necessarily lead to a decrease in activity which would only be temporary if the same are accompanied by a widespread liberalization of markets. It is possible but unlikely, for reasons beyond the scope of this post. All sorts of negative feedback mechanisms could be triggered in this situation, only enhancing the repudiation of the US sovereign debt and the resolve of the Fed to monetize it (For instance, the so called Olivera-Tanzi effect postulates that as inflation rises, access to working capital is restricted and firms delay their tax payments, to get them devalued by inflation. The government therefore receives depreciated tax revenue while its operating costs increase, facing deficits that need to be further monetized, thereby fueling even higher inflation).

In Argentina, this negative feedback was always resolved with the plain confiscation of citizens’ assets: Savings accounts in 1989, chequing accounts in 2001, pension funds in 2008, etc. (I can’t stress enough how important it is for anyone in the financial markets today to study the monetary developments in Argentina between 1972 and 1991)

Policy makers look the wrong way

The natural reaction from policy makers, so far, has not surprised me. Rather than addressing the source of the problem, they have and continue to attack the symptoms. The problem, simply, is that governments have coerced financial institutions and pension plans to hold sovereign debt at a zero risk-weight, assuming it is risk-free.

This problem truly brings western civilization back to the time of Plato, when there was nothing “…worthy to be called knowledge that could be derived from the senses…” and when “…the only real knowledge had to do with concepts…”In the view of policy makers,  the statement “the probability of US sovereign default is zero” is genuine knowledge, but a statement such as “The US government needs to issue about $100 billion per month to finance its fiscal deficit” is so full of ambiguity and uncertainty that it cannot find a place in their universe of truths…(Note: I am paraphrasing Bertrand Russell here. I am certainly not erudite)…and just like since the beginning of the 17th century almost every serious intellectual advance had to begin with an attack on some Aristotelian doctrine, I fear that in the 21st century, we too will have to begin attacking anything supporting the belief that the issuer of the world’s reserve currency cannot default, if we are ever to free ourselves from this sad state of affairs. The following paragraph, from a speech by Paul Tucker (currently Deputy Governor at the Bank of England) says it all:

“…Two strategies come to mind which I am airing for debate. The first would be ‘recapitalizing’ the CCP (i.e. central clearing counterparty) so that it can carry on.  The second would be to aim to bring off a more or less smooth unwinding of the CCP’s book of transactions…”  P. Tucker, Bank of England, “Clearing houses as system risk managers”, June 2011

Policy makers then believe in recapitalization and coercive smooth unwinds. With regards to recapitalization, I will just say that we are not facing a “stock”, but a “flow” problem. US Treasuries would be repudiated because of fiscal deficits, which are flows. No matter how capitalized a clearinghouse is, once the repudiation starts, the break-up of the repo market and the short squeeze would unfold and develop. Whether there is or not a capital buffer is irrelevant to the problem. In fact, in my view, it would be better that there wasn’t: Why would you want to add more resources to a lost cause?

With regards to smooth unwinds, I think it is obvious by now that the unwind of a levered position cannot be anything but violent, like any other lie that is exposed by truth. Establishing restrictions to delay the unmasking would only make the unwinds even more violent and self-fulfilling. But these considerations, again, are foreign the metaphysics of policy making in the 21st century.


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Sun, 12/02/2012 - 11:50 | 3028031 Seasmoke
Seasmoke's picture

Why is anyone waiting on "policy makers" to figure out a solution and do the moral and correct. Instead they should be sweating bullets when in public.

Sun, 12/02/2012 - 12:43 | 3028110 overbet
Sun, 12/02/2012 - 13:43 | 3028173 Silver Bug
Silver Bug's picture

The end game is rapidly approaching. The FED has RUN out of bullets. They are shooting blanks.

Sun, 12/02/2012 - 14:00 | 3028190 El Oregonian
El Oregonian's picture

More like: "They are shooting BlankS."= B/S

... Sadly, That is all that they have left...

Sun, 12/02/2012 - 14:25 | 3028212 FreedomGuy
FreedomGuy's picture

Every time I think they have run out of bullets, they find another. It is amazing what you can do with entries on a spread sheet.

Sun, 12/02/2012 - 14:41 | 3028229 imbrbing
imbrbing's picture

YEA, they just enter into the cell 1TTT of more bullets

Sun, 12/02/2012 - 16:14 | 3028333 Carp Flounderson
Carp Flounderson's picture

Yep, and fools who write articles like this still think the fed operates like a hedge fund or something.  SOOO close to understanding how the system works, but you guys just can't seem to get these retarded 'end times' out of your heads.  

Mon, 12/03/2012 - 08:58 | 3029233 kralizec
kralizec's picture

The End is Near!

Don't forget to decorate your favorite street light!

Sun, 12/02/2012 - 13:50 | 3028182 macholatte
macholatte's picture




The can shall be kicked!

"So let it be written. So let it be done."


These are not the droids you're looking for. Nothing happening here.  Move on.

Sun, 12/02/2012 - 16:48 | 3028384 negative rates
negative rates's picture

Yes the can shall be kicked, but only after it is set on fire!!!

Sun, 12/02/2012 - 13:59 | 3028183 CH1
CH1's picture

Why is anyone waiting on "policy makers" to figure out a solution and do the moral and correct?

Exactly. They will keep their game going till the last possible moment. They have to, really. After all, how would they ever gain the same advantages without a structure that maintains them as rulers over everyone else? Each of them would be just another guy, and not a terribly good one.

It's up to each of us to decide how long we want to continue supporting these clowns. How many beatings before we realize we can just walk away?

Sun, 12/02/2012 - 16:22 | 3028339 EuroInhabitant
EuroInhabitant's picture

The world economy is recovering. Please read AEP:

What end game? A new round of the old game has just started!

Sun, 12/02/2012 - 21:55 | 3028706 Surrealist
Surrealist's picture

What is it with AEP? He use to have so many good articles. Seem to be a pollyanna orgy of late.  

Sun, 12/02/2012 - 11:54 | 3028034 Yen Cross
Yen Cross's picture

Good God/ More charts from vindictive sodomite squids... Not you Tyler, I'm just tired of reading the past!

  People don't lose hope, they just get old and fed up with the B/S...

Sun, 12/02/2012 - 13:40 | 3028167 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

"People don't lose hope, they just get old and fed up with the B/S..."

Don't fuck with the oldsters, they'd just as soon kill you than put up with your shit!

Sun, 12/02/2012 - 15:17 | 3028250 AmCockerSpaniel
AmCockerSpaniel's picture

It's; " Don't f&%$# with old men. They have lived their lives, and have nothing left to loss."

Sun, 12/02/2012 - 17:53 | 3028469 lynnybee
lynnybee's picture

"People don't lose hope, they just get old and fed up .    Don't fuck with the oldsters, they'd just as soon kill you than put up with your shit!      how true, how true.   

Sun, 12/02/2012 - 14:03 | 3028188 disabledvet
disabledvet's picture

easy to get lost in the weeds in this let me sum it up for ya'. In 2008 we actually DID a minimum by not understanding the depth and breadth of the problem ("housing is not in a bubble")and at a maximum by just "flinging money around" in the hopes that it would "recreate the old order" (very different from "staunching the bleeding" as is being done in Europe i might add.) interest rates were surging, the deficit was soaring...the Endgame appeared nigh....and then. .... Like CPR the patient got a load of fresh air and "came to." Interest rates plunged, the market bottomed, an economic "recovery" of sorts took hold (i was out in Los Angeles in both 2008 and 2010 and the improvement was OBVIOUS.) Nothing but blue skies and sunshine? HARDLY. But the true "end of the world scenario" (collapsed dollar, mass social unrest, hyperinflation) did pass the USA by. So far. Now we have to deal with the REALITY of what happened...and indeed "there's a lot of B/S out there" not the least being "prices move in one direction" (higher) and "bubble re-inflation is a good...let alone do-able thing." Here's an interesting comparison for you: this is an article JUST BEFORE THE COLLAPSE advocating buying gold just before the price of IT collapsed as well. CLASSIC bubble re-inflation propaganda. but look how closely real estate tracks the price of gold. THIS IS AN AXIOM OF FINANCE since both gold and real estate are ultimately "financial goods"...goods whose price is driven higher by LENDING ACTIVITY. And how is our lending activity today? ABYSMAL. Remember this: this chart works in reverse. When gold collapsed so did real estate. Gold recovered...real estate never has. This is why the ability of a bank to create "carry" is so important ("borrow short at low interest rates...lend long and high interest rates.") this "reinflates the bubble" and allows the "natural rate of inflation" to be born out. But this is in fact not happening. Long fact ALL rates!.. are being driven DOWN by the Fed out of FEAR that the deficit could "go Supernova" and blow up the economy in a whole new way. Unfounded or not this policy has consequences...not the least of which "financial assets" (gold, coal, now steel, now copper) are DEFLATING in price. This ALSO is a that poses a significant DEFAULT RISK on large chunks of our economy. Think of it as "jingle mail for the State" (jingle mail being what all those homeowners did when they stopped paying their mortgages--they mailed the keys of the house to the bank.) my contention is that JPMorgan/Chase does not have a massive short interest in gold but in fact a massive LONG interest in it...and if the price of gold collapses THAT will be what collapses "The Morgue" not as is presented here and elsewhere "their need to drive down gold prices at all costs." (which of course is primae facie ridiculous. Why would a bank want lower prices for anything? The BANKER might....but certainly not the bank.) In other words STAY TUNED...this thing is far from over.

Sun, 12/02/2012 - 15:59 | 3028299 Urban Redneck
Urban Redneck's picture

September 7, 2008.

Sun, 12/02/2012 - 17:02 | 3028403 LawsofPhysics
LawsofPhysics's picture

The U.S. defaulted over 100 years ago.  You are, in fact, already a tenant of the Corporation of the United States.  The real owners are those major shareholders of that private bank called The Federal Reserve.  Please wake the fuck up.  I wonder what those owners plan on doing with their properties and assets?  To know that is to know the future, but yes, JPM is always long gold and holding physical because they know gold is the only safe store of value when it comes to settling trade accounts.  Has been for 6000+ years.


Sun, 12/02/2012 - 11:59 | 3028049 stormsailor
stormsailor's picture

when he speaks his tongue moves purtier than a 20 dollar whore

Sun, 12/02/2012 - 12:08 | 3028062 Landotfree
Landotfree's picture

"The problem, simply, is that governments have coerced financial institutions and pension plans to hold sovereign debt at a zero risk-weight, assuming it is risk-free."

Sorry buddy that is not the problem.  That is only one of the last symptoms of the problem you see or you want to identify prior to the collapse.   

"With regards to smooth unwinds, I think it is obvious by now that the unwind of a levered position cannot be anything but violent, like any other lie that is exposed by truth."

You are actually running from the Truth in your whole article, the Truth ie Math always wins the War although it loses countless battles.   Blaming a symptom or an event at the end of the cylce is neither identifying the problem nor is it exposing the Truth, what the writer is doing is telling additional lies to cover up the problem, unfortunately or fortunately the writer does not have the unlimited power needed to cover up the problem forever.

Sun, 12/02/2012 - 12:24 | 3028090 ebworthen
ebworthen's picture

So you're saying the real problem is the FED expecting normal people to work for money and not create it out of thin air like they do, right?

Sun, 12/02/2012 - 17:19 | 3028421 Landotfree
Landotfree's picture

The Fed is only a symptom of the problem.   It has nothing to do with the Fed and what they expect or even if they exist or don't.   The problem is simple.... people are extracting from the system greater than they put into the system... ie interest.   You attach interest to your medium of exchange and I care not what policies or organization structure you have... it's a ticking time bomb... usually 6-8 decades or a generation.

Using the same equation expecting a different result is not going to work.   What happens now is irrelevant it was decisions made before you were born that lead this to this point and time.... all you see today is noise to distract from the real problem.  

Sun, 12/02/2012 - 21:53 | 3028703 ebworthen
ebworthen's picture

And the system is extracting from the citizen greater than they give.

This is why creating money from nothing is immoral.

They give to banks and charge citizens.


No reason for anyone to work or pay taxes when it is clear that the Government and the Financial Industry are intent on parasitizing labor and private assets, and returning less than .50 cents for every dollar they take.

Sun, 12/02/2012 - 12:45 | 3028112 Water Is Wet
Water Is Wet's picture

Too bold, didn't read.

Sun, 12/02/2012 - 14:11 | 3028198 Landrew
Landrew's picture

Sadly, your critique has no meaning. So what is the problem other than the obvious, SYSTEM failure? Simply saying the FED is the problem isn't an answer. Your response was well written and I would genuinely like to hear your thoughts.

Sun, 12/02/2012 - 12:06 | 3028068 Lewshine
Lewshine's picture

I get it. I understand the "catch 22" scenerio coming at us at 225 mph. Nevertheless, the Fed has created an enviroment where the LIE controls the facts, however desperate the situation becomes. And until the mushroom cloud is in the rear view mirror, the Fed owns the action, the direction, the conversation and today and yesterday's results...Which will always be BETTER THAN EXPECTED.

The sheep will drink this cup, Zero Hedger's will look more and more foolish - And in a blink of an eye when most have copitulated comes the nuclear event that changes our lives forever. We wait on it as if it will be foreseeable...It won't be -At all!


Sun, 12/02/2012 - 12:25 | 3028092 WmMcK
WmMcK's picture

copitulated = capitulated + copulated?

Sun, 12/02/2012 - 12:59 | 3028121 Yen Cross
Yen Cross's picture

Juxtapost/ (Juxtaposed) for hard core "Grammatical Scholars"...

Sun, 12/02/2012 - 12:10 | 3028072 reader2010
reader2010's picture

Socrates was right when he famously said The unexamined life is not worth living for a human being.

Sun, 12/02/2012 - 12:14 | 3028078 francis_sawyer
francis_sawyer's picture

I [most excellently] learned that from Bill & Ted...

Sun, 12/02/2012 - 13:25 | 3028150 Sextus Empiricus
Sextus Empiricus's picture

I remember that.

Sun, 12/02/2012 - 12:12 | 3028077 Yen Cross
Yen Cross's picture

 I'm looking at a bit of a outside weekly close on risk F/X and HYG)  The shorts might have some strength next week/ The Middle East is blowing up again, and that Fiscal something is a lose/lose Greek scenario...

  Watch out for tape bombs  at market closes/ The heck with New York trading until 3:00 p.m.

Sun, 12/02/2012 - 12:19 | 3028083 ebworthen
ebworthen's picture

What is money?

If the FED can "buy" Treasuries and MBS's with "printed" money from nothing (Ctrl+P) then why mark the other end of the ledger?

Why not send every taxpayer $50K for Christmas and $100K for New Years?

Why even mark the debt column? 

If they were doing this with conviction and the whole idea were not a lie they would.

Sun, 12/02/2012 - 12:24 | 3028089 Yen Cross
Yen Cross's picture

People need to eat, and commodities fluctuate in price/The real currency is food.

Sun, 12/02/2012 - 17:01 | 3028401 Big Slick
Big Slick's picture

If it were possible to just print and distribute money, we would all still be Romans.

Sun, 12/02/2012 - 21:54 | 3028705 ebworthen
ebworthen's picture

Please clarify.

Sun, 12/02/2012 - 17:06 | 3028410 LawsofPhysics
LawsofPhysics's picture

It takes energy to actually do anything, including grow plants (food).  The availability of energy always trumps all.  In fact if you unleash enough energy at once, you just have to come back later and pick up want you want.  Think about it.

Sun, 12/02/2012 - 14:07 | 3028193 disabledvet
disabledvet's picture

that's what caused Germany's hyperinflation..."giving money" directly to people. The question you need to be asking is "is this variant of money giving working as intended"...and of course the answer is "no." drives down interest rates...but the INTENT is to "create jobs" via "growing the economy." For that to happen to Fed needs to STOP what it's doing..."do nothing" in effect.

Sun, 12/02/2012 - 15:51 | 3028284 ebworthen
ebworthen's picture

Yen Cross and disabledvet,

That is what I'm getting at.

If you distill this down it is a simple matter of morality.

The FED and the U.S. Government want me to work for money yet they create money from nothing and place the debt on my progeny and I.

Therefore, if I work for money I am working for my own enslavement to them.

It is immoral for the FED to create money from nothing.

Sun, 12/02/2012 - 19:18 | 3028509 nmewn
nmewn's picture

It is also immoral for government to treat us as its property to be milked like cows.

WASHINGTON — The Obama administration said Friday that it would charge insurance companies for the privilege of selling health insurance to millions of Americans in new online markets run by the federal government.

The cost of these “user fees” can be passed on to consumers. The proposed fees could add 3.5 percent to premiums for private health plans sold in insurance exchanges operated by the federal government. "

Sun, 12/02/2012 - 21:49 | 3028701 ebworthen
ebworthen's picture


Sun, 12/02/2012 - 20:31 | 3028610 Bear
Bear's picture

I think you miss the point ... they print money not to accomplish their Congressional approved dual mandate ... but to refinance and refund the previous grievous abuses of the American Bankstering System. If you want to know what's going on in the world get  a copy of Geroge Soros's daily calendar.  


Sun, 12/02/2012 - 22:21 | 3028746 Debt-Is-Not-Money
Debt-Is-Not-Money's picture

"What is money?"

Money is purchasing media/medium-of-exchange placed into circulation wthout interest owed, if interest is owed then it is debt!

ALL of our currency is encumbered by interest and is therefore debt.

We have NO money (except for our valueless counterfeit coin).

Sun, 12/02/2012 - 12:38 | 3028105 Peter Pan
Peter Pan's picture

The world is full of too many accounting entries based on conjured up money. This system has played havoc with the free market, which in turn the FED and others seek to manipulate in order to justify the accounting entries and conjured up money which in turn allows the owners of this fake wealth to continue stripping people of all remaining real wealth.

Sun, 12/02/2012 - 13:30 | 3028157 Poor Grogman
Poor Grogman's picture

The thing that has changed is that people can now see, examine, and discuss this modern financial paradigm that has become our prison.

When the "whole idea" of something no longer makes any sense to a majority of people then that idea will be cast aside, as is already happening with the " competing currencies" of PMs, bit coin,etc.

I still think there is plenty of inertia and a certain amount of resilience left in the current system though. Consequently I think we are in for a drawn out reset, perhaps over many decades...

Sun, 12/02/2012 - 13:36 | 3028165 grid-b-gone
grid-b-gone's picture

True. We are past the point at which an unwind was possible.

Only Iceland got it right.

Now that the structured deleveraging opportunity has passed, having been papered over, the market will provide the fix.

The market solution possibilities are growth with fiscal restraint, or default. Even if we got growth right now the lack of fiscal restraint would probably still mean default would be the eventual, final solution. This is because every day that is not FAIL day, is used as evidence that the correct policy direction has been chosen.

As long as fiat money is accepted, we can muddle along on this path for some time. Maybe a year, maybe ten years - nobody knows.

At some point the music stops. One needs to own a chair outright, or be able to buy one with a medium of exchange that will still be accepted, or be willing to start again from scratch post-reset.

I own a chair and it's not for sale.    

Sun, 12/02/2012 - 12:48 | 3028115 Yen Cross
Yen Cross's picture

 China has 1.3 BILLION patrons/ I'm sure they are well - nourished<

Sun, 12/02/2012 - 12:59 | 3028126 woggie
woggie's picture

the beast is on the gobble
and all that matters is we're all headed for it's belly

Sun, 12/02/2012 - 13:48 | 3028179 A Middle Child ...
A Middle Child of History's picture

Woggie would oft post to this site,
A link that was nothing but shite,
What a fool and a bore;
One couldn't possibly do more,
to waste so many a byte.

Sun, 12/02/2012 - 13:02 | 3028128 kahunabear
kahunabear's picture

Yes, the delusional crowd is completely ignoring the obvious risks of government debt. The more insolvent our government becomes, the lower rates go. This is totally counter intuitive and sure there is plenty of coercion involved. But, all bubbles and ponzis are confidence games. Nobody can predict when the worm turns. I would have thought long ago, but I guess globalization means more folks in the game.

Sun, 12/02/2012 - 13:11 | 3028137 zavrakidis
zavrakidis's picture

world domination is the end game


Sun, 12/02/2012 - 13:15 | 3028142 AnAnonymous
AnAnonymous's picture

What default does this 'american' speak of?

'Americans' have this enamoured feel toward submission.'Americanism' is all about submission and this 'american' once again celebrates the eternal 'american' nature.

Starting with lambasting the financial dimension, this 'american' author, as usual, wants to substitute a set of lies by another set of lies, its own.

Default? But the only way 'americans' do not default at the moment, it is when they prove their claimed ability to overcome the environment.

Showing any ability to return to the environment all what they've consumed. And that is a lot.

Are there people around thinking 'americans' can do that?

Even 'americans' do not believe they can not do that.

That is when their manipulation of financial/monetary or whatever debt is all oriented not to allow a paying back on the debt (they know it to be out of their capacities) but to allow the optimization of the debt issuance so they can maximize the consumption of the remaining resources.

Any action toward debt by 'americans' shall not be assessed by the hypothesis 'americans' are on to pay back the debt but on the real ground that 'americans' want to go deeper into debt.

'Americans' have no solution to go out of the debt. They only have solutions to go deeper into debt.

Because, out of 236 of 'american' history, it's been a long time since 'americans' defaulted on the physical debt. The only one mattering at this point.

Sun, 12/02/2012 - 13:32 | 3028151 Yen Cross
Yen Cross's picture

Your ineptness is amazing/ You aren't worthy of a {down vote}...

Sun, 12/02/2012 - 13:39 | 3028168 CunnyFunt
CunnyFunt's picture

Playing the paper ponies this week, YC?

AUDJPY short, perhaps?

Sun, 12/02/2012 - 13:48 | 3028178 Yen Cross
Yen Cross's picture

GBP/JPY has better risk reward/ I'm going to trade some paper. Damn, you are smart/ I can't get anything past you/

Sun, 12/02/2012 - 14:09 | 3028194 CunnyFunt
CunnyFunt's picture

No, just fishing the "pros" ;-)

Sun, 12/02/2012 - 13:36 | 3028163 Poor Grogman
Poor Grogman's picture

An annoying mouse has this enamoured feel toward Tibetan citizen submission. Tibetan citizenism is all about submission

So says annoying mouse...

Sun, 12/02/2012 - 19:14 | 3028505 PiratePawpaw
PiratePawpaw's picture

What in the hell are you blabbering about today Al-Anon?

None of the Americans I know are enamelled or enamoured or anything else to do with submission.

Return to your "Basics of English Grammar" class, and let the grown ups talk.

Sun, 12/02/2012 - 13:48 | 3028161 cranky-old-geezer
cranky-old-geezer's picture



we too will have to begin attacking anything supporting the belief that the issuer of the world’s reserve currency cannot default,

Nobody is saying they can't default.  But they won't default.  A nation printing its own currency doesn't have to default, they just print more currency to fund additional govt debt if nobody else will buy it.

So US govt debt won't default, but it will lose value as the currency loses value, and if enough printing is done, the debt becomes worthless when the currency becomes worthless.

So no, there won't be any Greece-like default, not even a haircut. 

But there will be currency collapse sooner or later, and that $16 trillion of debt will simply be worthless.

That's the plan.  Just inflate it away slowly, quietly, tilll the currency is worthless and the debt is worthless too, those treasuries will be toilet paper, nothing more.

Hear that China, Japan, US pension funds?  The Fed is quietly draining value out of those treasuries you hold, and they'll keep draining value out of 'em till they're worthless. 

Treasuries you bought just 4 years ago have lost half their value already.

Sun, 12/02/2012 - 14:13 | 3028201 disabledvet
disabledvet's picture

again...Japanese "shock-ku." This is when the bubble bursts in DEBT not equity. Gold is the "price signal" in FALLING IN PRICE. This is the ULTIMATE in collateral calls..."now your country owes me a TRILLION DOLLARS." Oooops!

Sun, 12/02/2012 - 14:22 | 3028209 Ghordius
Ghordius's picture

Simplified and to the point, imo

"the US dollar zone/system is not bound by geographical or jurisdictional borders"

worth remembering that the DollarZone is the whole world minus Iran

Including the Treasury Primary Dealer called China and all the central banks that supported the Bretton Woods system

Sun, 12/02/2012 - 14:48 | 3028235 Sooth
Sooth's picture

Don't forget life insurance policies.They are generally denominated in dollars, not in ounces of gold or in tons of soybeans.

At the end of 2010, the total value of life insurance coverage in the US was $18.4 trillion.

Sun, 12/02/2012 - 14:38 | 3028218 gnomon
gnomon's picture

Possession of Gold or a complete understanding of our current situation will soon be declared treasonous acts punishable by death, if either is revealed or acknowledged.

Sun, 12/02/2012 - 15:35 | 3028267 AgShaman
AgShaman's picture

Of course.

You were encouraged to "enjoy" the benevolent slavery provided for you....not improve your station outside the slave class you've been sanctioned to support.

Now that you serfs are no longer manageable...

The Creditors need to be bankrupt through global wars or....

a more sizeable solution could be implemented to restructure the base of power.

"See what you malcontents and gold-bugs have forced us to do"?

Sun, 12/02/2012 - 14:49 | 3028236 buzzsaw99
buzzsaw99's picture

oh yeah, the banks were coerced into buying all those gubbermint backed loans. what a bunch of crap! As for the pension funds whatever sicko wrote this just wants them to buy what he is selling. Most pensioners have debts and they just want their nominal clownbux back when they retire. The author is worried about flow alright but not in the way he wants us to believe. The fucked up flow is in the stock market and this twisted twat is trying to get everyone distracted by something else.

Sun, 12/02/2012 - 15:02 | 3028245 NoDebt
NoDebt's picture

"This ship is unsinkable!"

"I assure you, sir, she is made of iron and she WILL sink.  The pumps buy you time, nothing more."


Sun, 12/02/2012 - 15:31 | 3028262 Tombstone
Tombstone's picture

Increasing taxes will not pay down the debt.  There will not be any meaningful cuts to the deficit.  Whatever comes out of Washington will be BS disguised as sweet smelling roses using smoke and mirrors.  We are in a welfare/entitlement spending death spiral supported by a government that is out of control.  Washington overspends and then expects the FED to bail them out.  5,10, 15 years from now, there will be more debt on the books, not less.  The end game will not be pretty and few will ever pass GO and collect their $200.  The financial system is no longer pure and predictable.  It has been "jimmied" to the max and who knows what will trigger the explosion.  Who can we trust in this socialistic/centrally planned government?

Sun, 12/02/2012 - 15:53 | 3028290 ebworthen
ebworthen's picture

This is a simple matter of morality.

It is immoral for the FED to create money from nothing.

Sun, 12/02/2012 - 20:26 | 3028602 Bear
Bear's picture

No, no ... they are doing it to maintain stable prices and reduce unemployment, their dual mandate.

Sun, 12/02/2012 - 21:48 | 3028698 ebworthen
ebworthen's picture


Oh yeah, I forgot.


Sun, 12/02/2012 - 16:15 | 3028335 jldpc
jldpc's picture

Scary stuff. But really why did Greenspan use interest rate changes like a drunken sailor driving and crashing from curb to curb? And why did Bush lie to start a war - remember WMD threats and then not raise taxes to pay for it? And why is Obama following blindly the Chicago gang power grab - first we get a well speaking dummy in there, and then we run the New England democrats out of pqarty power by running the Republican house members out? Anyone see Geither today - as more and more Republican politicians swear off the no tax increase pledge. Does anyone know how broke and corrupt Illinois is? The politicians there and their Univ of Chicago elite economists are the WORST neo-communists in the civilized world. They really and truely believe that the yare entitled to spend your money - OPM - to gain power. Do not believe for a moment that their true desire is to improve the lot of the poor. Just go visit the South side of Chicago. What you are watching is a war for the control of the Democratic party and the destruction of the Republican party. And Bernake out of a grossly misplaced sense of trying to save the country is playing into the hands of the CHI-mob. By buying up all of the Fed paper - and watch what he does next year - there will be a crisis or psuedo-crisis - there always is; not say there aren't enough good candidates for one around the world and here in the USA (how about Shumer S: NY needs $86B to repair NY and NJ on top of what Obama wants to spend - he will play big time into it, and we will be at $20T before you can say "suck my ...."

Sun, 12/02/2012 - 16:19 | 3028338 I am Jobe
I am Jobe's picture

Ah the Blame Game to protect the own. Time has come for the blame to end ad nothing to show for other than to see how screwed up the system is.

Sun, 12/02/2012 - 16:41 | 3028365 Venerability
Venerability's picture

You actually hacked into and deleted one of my comments?

Never, ever has that happened before - and if you think you're going to get away with it, you are sadly mistaken.

Sun, 12/02/2012 - 17:04 | 3028408 earleflorida
earleflorida's picture

The unmasking or better said tempting of a latent, yet ambiguous carpe`diem! This 'Neo-Scylla and Charybdis' warring monster dining always on ill-gotten dilemma's... this 'Council on Foreign Relation's Affairs'-- this age old carthage having 'nine-lives... that only a fiat could flame?

"The Tale of Another Chairman"... Richard H. Timberlake [6/1/99]      Ref:

Great read! 

Sun, 12/02/2012 - 18:06 | 3028481 earleflorida
earleflorida's picture

Excerpt: a classic... sound familiar ?

"Congress' Role in the Fed_Treasury Dispute"

"Treasury-Federal Reserve tensions had caught the attention of Congress as early as 1949, and had become the object of an investigation by the Subcommittee on Monetary, and Fiscal Policies chaired by Sen. Paul Douglas. Douglas had been a professor of economics at the University of Chicago , and he new the difference between a dollar and a government bond. The Subcommittee made a report in January 1950, a full year before the conflict that Eccles chronicled. 

The essence of the Douglas Committee Report was that both the Fed and Treasury should follow the norms for employment, production, purchasing power and price levels implied by the Employment Act of 1946. The Report also stated that "the will of Congress" was for the Fed to have "primary power and responsibility" over the cost of credit, and that the Treasury's actions with respect to money and credit should "be made consistent with the policies of the Federal Reserve--- and not the other way around.

end excerpt!

... and there you have it... a fedora salesman solving america's fiscal problem at the beginning of another 'CFR created War'!!! 

Sun, 12/02/2012 - 19:10 | 3028497 Legolas
Legolas's picture

Wheewwwww!   Zerohedge was just unavailable for a period of time.  It's back now.  Still a little jittery here, but it was a good drill, locating my bug out bag, and all that !!

Sun, 12/02/2012 - 19:23 | 3028519 earleflorida
earleflorida's picture


Sun, 12/02/2012 - 19:15 | 3028506 kevinearick
kevinearick's picture

Witches & Warlocks: Live the Fantasy

…until it becomes a nightmare of tyranny. The more control the empire exerts, the less it controls, which is what you are observing, a collapsing middle class completely controlled by its false assumptions, with an infrastructure collapsing around it, captured in a ponzi of ineffective habit, addicted of its own free will.

The Law, “you can’t fight city hall,” is a lie, and the accounting system is a positive feedback signal designed to perpetuate it. If you fight city hall, it grows, with monetary expansion. If you work for city hall, it grows, with your spending habits, AC into DC.

The obvious solution, to any laborer, is to ignore it and be about your business, beyond the empire’s false assumptions, into the unknown. If you have a sufficient magnet, you don’t have to sift through the gravitational haystack to find the needle.

To save itself, at the demographic wall, the empire must accept assistance from beyond its control; it must break its habit, which it cannot do, leaving it in a catch-22. So it reaches out with more and more government “assistance,” accelerating the collapse, buying less and less control on the margin with monetary expansion, as labor moves farther and farther away from the implosion.

Each catch-22 invariably leads to another upon deleveraging, reversion to natural law. Empires live and die with fear. “When the pain exceeds the fear,” hence zombification, self-medication for the masses, increasingly desperate to capture the wayward traveler. Careful what you wish for.

If you’ll notice, the middle class will surround you, with inquisition, assuming majority control. It will not accept the truth, ignoring it completely at the conscious level, but instead seeks tidbits, one after the other, to assemble its puzzle, its conception about you, compiled to enslave or destroy you. Simply tell them the truth, by doing, and walk away. Their system will begin to implode immediately, do to Asimov’s Laws. Robots cannot tolerate unknowns, and “freeze” accordingly.

Asimov: with their horrid world and short lifespan, they have so little to lose, I thought that they would surely welcome the chance, especially if we help them technologically…They would build a world so well, you see, that when they are done and Auroreans are finally willing to leave, our human beings will step out of Aurora and into another Aurora. They will have never left home; they will simply have a newer home, exactly like the other one, in which to continue their decay…Some of you, I think, will insist on remaining imprisoned…Of course. Perhaps most of us will.

No participant wants to wake up to their imprisonment, destined to remain captured by the momentum of their addiction, passive aggressives running corporations, complaining about other corporations, for equal rights, which mathematically can only result in bifurcation, a race to the lowest common human behavior for the majority, and one step up to tyranny for the minority, with a few escaping the system all together, as the orbiting fulcrum implodes. Basic physics.

If you have some requirement for gravity, you have to give the corporation every advantage, and tend to it yet again just to get it through each day, because all it has to go by is a rear-view mirror, its own History, by design. Love is the only bridge to the future, and corporations, upon which their participants depend for their livelihood, cannot love. The middle class is incorporated accordingly.

In short, being a laborer is a major pain in the a-, for which there is no just compensation. You do it because you love your children. Not so ironically, if you think about it, the empire must take your children and give them to a homosexual couple, with ever-increasing energy expended on the process of misdirection, to keep its false promise of entitlement, equal rights.

So, the first year, you spend 7/24 training your newborn, and, the second, you withdraw over time. By then, nearly all children have assessed their situation and decided whether being unique is a worthwhile proposition. At that point, those who choose to become part of the herd begin to choose the false assumptions that will control their lives. In irony of ironies, they choose to forget that they chose, creating the looking glass, the false ego.

Depending upon your perspective, the empire makes a big mistake kidnapping the children of labor, or it doesn’t. Opinions vary, into a distribution, left behind in the past. By breeding, the middle class isn’t happy unless it can have what it cannot have, return of love without investing love, which the empire simulates in a demographic ponzi, until it can’t, when the middle class collapses, and throws itself under the bus, which tells you that labor has finished constructing the necessary magnet to find the needle, the new heading on the compass.

Ewald: and God be praised for it! Think what good luck it is that he did not know the danger, when he made his promise, that he does not understand now, when he is keeping it. What a lucky beggar! By the time he is big enough to know his danger, it will be an indispensible habit with him.
Unless you can deliver a better fantasy than Wall Street, there is no point in arguing against it. You have two years to help install a sense of responsible independence in your children. If you fail, Wall Street, History, pretty much owns them. Call it capitalism, socialism, or witchcraft, corruption is corruption.

What do you expect when you give an empire an entire age to perfect its control system? Africans are not nearly as dumb as their multiplying rejects would have you assume.

Sun, 12/02/2012 - 19:46 | 3028557 Unlawful Justice
Unlawful Justice's picture



 The Fed System is just like the Church.  That’s probably why so many feel comfortable with it. It’s got a pope, the chairman; and a college of cardinals, the governors and bank presidents; and a curia, the senior staff.  The equivalent of the laity is the commercial banks.  If you're a naughty parishioner int the Catholic Church, you come to confession.  In the Fed system if your naughty, you come to the Discount window for a loan.  We even have different orders of religious thought like Jesuits and Franciscans and Dominicans only we call them pragmatist and monetarist and Keynesians.  Money like religion requires the participants to have faith in something.  The truth rest in the center of the word... you must be-lie-ve IN GOD WE TRUST for the system to work.   

Sun, 12/02/2012 - 20:01 | 3028577 helping_friendl...
helping_friendly_book's picture

We will know the ponzi scheme continues as long as REPO is still a legal accounting tool and CDS still exist.

All the CBs have coordinated their printing in concert and will continue to do so. The only constraint on QE is wage pressure, which, doesn't really exist since workers will tolerate inflation and tolerate reduction in wages because if they don't they will lose their jobs. Take Hostess as an example:

WON'T TAKE A 10% REDUCTION IN WAGES? Fuck you we declare bankruptcy and we will take your pension too!

As long as the Police get paid we will have to continue taking it.

Sun, 12/02/2012 - 21:58 | 3028710 robertocarlos
robertocarlos's picture

 The deficit will be taken care of by the affable GOP guy I saw on FOX news today. No worries.

Mon, 12/03/2012 - 01:01 | 3028949 andyupnorth
andyupnorth's picture

There is no morally sound method of distributing money that was printed out of thin air.

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