Guest Post: Essays In Fragility: Our One-Off Economy

Tyler Durden's picture

Submitted by Charles Hugh-Smith or OfTwoMinds blog,

If you set out to create an increasingly fragile economy, you'd do precisely what the Federal Reserve and our political "leaders" have done.

All the extraordinary measures deployed since 2008 to jumpstart the U.S. economy are one-offs: either they cannot be repeated or they have lost their effectiveness.
As a result, we now have an extraordinarily fragile one-off economy that is dependent on "emergency" measures that cannot be withdrawn even as their utility in the real economy dwindles by the day.
These two dynamics--declining effectiveness and unrepeatability--have created a uniquely fragile economy. Once you become dependent on extraordinary fiscal and monetary stimulus, withdrawing the stimulus will trigger a recessionary cascade. But continuing the stimulus cannot duplicate its initial effectiveness, as malinvestment and unintended consequences degrade the initial boost.
We cannot add another $1 trillion in borrowed money to the $1.3 trillion we're already borrowing every year. The Federal Reserve could expand its balance sheet by another $2 trillion, but in sharp contrast to its earlier injections, the "high" from its latest QE stimulus was next to non-existent.
Consider the effects of expanding money supply and lowering interest rates, the Federal Reserve's two primary policies of sparking escape velocity, i.e. a self-sustaining recovery.
Here is real (adjusted) GDP. Note that GDP (which includes debt-based government spending) has barely edged above the late-2008 highs:
Now look at M2 money supply. It has shot up by about $3 trillion since late 2008. All that expansion accomplished was a return to pre-recession levels. But this is only part of the picture, as unprecedented Federal fiscal deficits pumped $6 trillion in borrowed money into the GDP in that time frame.
So $9 trillion in "free money" merely kept the economy flatlined. If this is a self-sustaining recovery, then we should be able to eliminate the $1+ trillion we're borrowing and blowing every year above and beyond 2008's $300 billion deficit, and we should be able to restrain money supply expansion, too.
Everyone know what would happen if Federal spending returned to 2008 levels (i.e. $1 trillion less annually) and money supply stabilized: the economy would fall off a cliff.
Here is the velocity of money. You know the fable that periodically makes the rounds via email: a single $100 bill that comes into town circulates from hand to hand and ends up paying off everyone's debts in the entire town. The velocity of that $100 was very high. If the same $100 was stuffed under a mattress, its velocity would be zero.
If money has no velocity, it is dead money. This is a chart of dead money:
The Status Quo is now trapped in a brittle hall of mirrors. Its fiscal profligacy has fueled malinvestment on a grand scale, not a self-sustaining recovery, and its reckless monetary policy of endless easing and zero-interest rates (ZIRP) have led to a dead-money economy: there is plenty of money sloshing around but either A) those who want to borrow it are not qualified to borrow it or 2) those who are qualified to borrow it have zero interest in borrowing it; they are desperately trying to pay down their existing debts, not acquire more debt.
Who has access to this liquidity? The financiers whose gambles are subsidized and backstopped by the Federal Reserve and the Treasury--the very players who triggered the 2008 global financial meltdown, the very players whose gargantuan losses we are still paying for.
If you set out to create an increasingly fragile economy, you'd do precisely what the Federal Reserve and our political "leaders" have done: take politically expedient one-off stimulus policies and extend them into permanent policies.

My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts.

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SmoothCoolSmoke's picture

"But continuing the stimulus cannot duplicate its initial effectiveness"

Except of course, for the stock market.   Just watch tomorrow.


economics9698's picture

Which is why we are all looking at the bond market bubble to burst. 

Silver Bug's picture

Once the bond bubble bursts, the global economy is in for a world of hurt.

LawsofPhysics's picture

"If the bond bubble bursts, the global economy is in for a world of hurt and the world goes to war." - fixed

History is very clear when it comes to the ultimate failure of the paper promises of sovereigns. Get your tribe in order.

FL_Conservative's picture

And what does one think will happen when all that "dead" M2 gets "resuscitated"?


(Buy PM's)

economics9698's picture

I would suspect the average ZH reader is well versed on these charts.  


CH1's picture

Then why don't you post a few things that we should be reading instead?

economics9698's picture

I do on occasion.  This blog is about teaching bull shit at the university and exposing one of the thousands of bull shitters. 

I have offered to write for ZH but they seem to be booked solid.

falak pema's picture

why don't you post something here as a contributor to forum by picking your themes and back referencing us to your blog for economic back up. 

Making a case from  your perception  if you have strong points to make should be simple for a man who understands the problem and can point to the roots and the consequences. Go for it. 

Cognitive Dissonance's picture

"If you set out to create an increasingly fragile economy, you'd do precisely what the Federal Reserve and our political "leaders" have done: take politically expedient one-off stimulus policies and extend them into permanent policies."

We are taught since grade school about stupid, greedy, self centered men and their disastrous least disastrous to you and me. War, corruption, traitorous actions etc. And for thousands of years no less.

But what if there is much more going on behind the scenes that "just" greed run riot? Can we even look there.....gaze into the eyes of the sociopath.......or are we just too frightened?

LawsofPhysics's picture

If the French could do it, we should be able to.  Of course, those individuals are long dead now...

fuu's picture

See this is the kind of article Charles can write when he wants to.

PS Please buy my book...

LawsofPhysics's picture

Exactly.  Now that fraud is the status quo on earth, is anyone really surprised that the underlying fiat currencies and assorted paper promises are also dying?

Poor Grogman's picture

Why doesn't the EPA do it's job properly and declare paper money to be hazardous waste?

earleflorida's picture

writing book[s], doesn't necessarily get you rich... but, if it bifurcate's your intellectual inquisitiveness-- it's truly done its job 

i'm not talking about a steven king, et.el

great read C H-S 

fuu's picture

I'm holding out for his recipe book.

Darth Mul's picture

No no no!


If governments don't deficit spend, it's exactly like applying leeches to hemophiliacs.


Don't you god damned reactionary, right wing rubes get it?



HeatMiser's picture


Lin S's picture

I have good flow. 

Saw Palmetto helps.

1835jackson's picture

So what you are really saying is that exponential growth is not sustainable in a finite world...well I’ll be.

buzzsaw99's picture

Any questions on the effectiveness of Fed policies?

Yes, that question is on the wrong chart. Q: Where is the chart of Wall Street bonuses?

Bohm Squad's picture

Turn your screen upside-down...look at third chart.  "Two-fer"

GottaBKiddn's picture

To expect fairness in markets, economies, or governments is naive, for fairness is a character virtue, which is foreign to the realm of finance and politics. We all learn this on the playground.

LawsofPhysics's picture

Correct.  We also learn that when everyone takes their marbles and goes home, shit gets real.  This is why any median of exchange must have some inate ability (although everything can be gamed) to protect against fraud.

Fine with me, I was paying attention when my grandfather (did quite well through the great depression and two world wars) was speaking.

possession is now the law.

hannah's picture

the HUGE ERROR in this story is that we HAVE an economy...?! 50% of all jobs are gov jobs. every penny of corp profit comes from sales to the gov. .....WE DONT HAVE AN ECONOMY...WE HAVE A PONZI JOKE...

1835jackson's picture

As a green card holder who escaped the queen’s rule and the socialist ideals that went with it I am horrified at what is going on in America right now. Where the FUCK are the so called patriots? Where is the tea? Where is the harbor?