Guest Post: The Real 2013 Cliff

Tyler Durden's picture

Submitted by John Aziz of Azizonomics blog,

There’s a much bigger cliff than the so-called fiscal cliff. The absolute worst result of the fiscal cliff would be a moderate uniform tax increase at a bad time, resulting in a moderate contraction. It is an obvious - but ultimately rather cosmetic - stumbling block on the so-called “road to recovery”.

The much bigger cliff stems from the fact that the so-called recovery itself is build on nothing but sand. This is a result of underlying systemic fragilities that have never been allowed to break. I have spent the last year and a half writing about this graph — the total debt in the economy as a proportion of the economy’s output:

This is the bubble that won’t go away. This is the zombified mess that the Federal Reserve won’t let dissolve (as happened regularly in the 19th century and early 20th century each time there was an unsustainable debt bubble). This is the shifting sand — preserved by the massive monetary stimulus programs — that the so-called recovery is built upon. During the 1980s and 1990s and 2000s cheap money pumped up the debt level in America. In 2008, the bubble burst, and the hyper-connective fragile financial system was set to burn. Then central banks around the world stepped in to “stabilise” (or as Nassim Taleb puts it, overstabilise) the financial system. The unsustainable reality of debt vastly exceeding income was put on life support.

A high pre-existing residual debt level makes growth challenging, as consumers and producers remain focussed on paying down the pre-existing debt load, they are drained by pre-existing debt service costs, and they are wary about taking on debt or investing in a weak and depressed environment. It’s a classic Catch-22. The only true panacea for the depression is growth, but the economy cannot grow because it is depressed and zombified. That’s where a crash comes in — the junk is liquidated, and clearing the field for new growth. That is what Schumpeter meant when he talked of “the work of depressions”, something that many mainstream economists still fail to grasp. (In fairness, a similar effect can probably be achieved without a depression through a very large scale debt relief program.)

Japan has been stuck in a deleveraging trap for twenty years, to no avail, all that has really occurred is that the private debt load has been transferred onto the central bank balance sheet — there has been very little net deleveraging) and while the Japanese central bank has completed round after round of quantitative easing — sustaining and preserving the past malinvestment and high debt load — the Japanese economy is still depressed.


That is the road America and most of the West are now on. And just as Japan’s bank stocks did multiple times even after the Japanese housing bubble burst, American banking stocks — even in spite of a year of fraud, abuse, mismanagement and uber-fragility — have been shooting up, up, up and away:


The zombie financial sector is the real cliff — as interconnective as ever, as corrupt as ever, and most importantly, nearly as leveraged as ever:

Margin Debt November 2012

This is a reinflated bubble built on foundations sand. I don’t know which straw will break the illusion (middle eastern war? Hostility between China and Japan? Chinese real estate and subprime meltdown? Student debt? Eurozone? Natural disasters? Who knows…) but this bubble poses a far greater threat in 2013 than the fiscal shenanigans and the Boehner-Obama “Boner-Droner” snoozefest.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Atomizer's picture



While we approach the 11th hour of fiscal cliff bullshit by fear, it’s time to roll out the new US Basel III banking rations. This is the real core of sundry MSM [drama queen] propaganda inventions thru topic avoidance.  /LOL


andyupnorth's picture

So it appears that the Federal Reserve & Co. really hates to see total private debt decrease, regardless of the exponential growth of government debt.


Power to the People!

Starve the Beast!

We will not be debt slaves!


[Disclaimer: Paying off my mortgage debts takes many years of discipline and dedication, especially due to family responsibilities and social pressure, but we're slowly but surely doing it!]

Pharming's picture

Agreed!  I'm right there with you Andy in the North.  

Hey, your picture reminds me of a Falstaff bottle cap.  

Pharming's picture

Ahhh....2013 My resolutions...


1.  Stop clinching my teeth.

2.  Send links from Zerohedge to someone new weekly.

3.  Stop biting the inside of my lip.

4.  Secure the bunker.

5.  Get a bigger safe.

6.  Increase my share in Cabelas and subsequently lead.

7.  Buy silver mines.  

8.  Donate to William Banzai for Fed Chairman campaign.

9.  Get on waiting list for liver transplant.

10.  New bayonet.

IridiumRebel's picture

As for the 2012 "CLIFF" (Crappy Legislators In Full-on FuckStickness)......


An unknown source from a reliable member of a senate team player who has an advisor says that they are in fact talking and that talking is going to lead to a conversation where they will speak about a solution. And on that news, the DOW is moving higher.

Dollar Bill Hiccup's picture


You MUST take another HELOC ... NOW !

If the system falls apart and you get angry, you will be allowed to throw rocks.

THEN you will be put into an internment camp. You will be kept SAFE from YOURSELF.

SAVING is a DISEASE which must be cured.

WE WILL CURE YOU if you have this disease.

Warning : Sarcasm and Irony can have dangerous consequences.

Mark123's picture

This about sums up the intelectual depth of the debate:

"We can't use tax increases on anyone to pay for more spending," said Sen. Kay Bailey Hutchison, R-Texas.

That this can even be uttered against a backdrop of +$trillion deficits for the past 5 years funded almost entirely by central bank money printing is astounding in its stupidity.

Keep shopping people....everything is A-OK.'s picture

We're past the point where it would make a difference but tax increases should have been used to pay down existing debt rather than as a justification for loading on more debt.

billybobtx's picture

Good ol' Kay Bailout. What a nimrod.

gdogus erectus's picture

This will break when they want it to break. The sharade of printing money and giving it to themselves can continue for quite some time. The throttle on the economy that seems to make an instant difference is gasoline prices. As this is yet another manipulated market, it appears that the point of raising and lowering gas prices is to keep the economy exactly where it is: In suspended animation. Used as cover for continued printing of trillions for themselves. This game could continue for a long time.

sbenard's picture

I think the Mother of All Bubbles is US government debt. When that bubble pops, life as we have known it for the past half century will come to a very sudden and cataclysmic end.

orangegeek's picture

Government at all levels has made itself indisposable by becoming the largest customer of the private sector.


Government will continue to spend tactically to get re-elected.


For the other side to get elected, they have to block spending.


So Barry is playing the blame game - it's his only card left.


And in the end, private sector revenue and earnings will tank as will the markets.

Manthong's picture

The CB’s have all the paper, all the electrons and all the shills in the world to keep their Ponzi going forever for those who stack paper and electrons.

I was thinking about how the evil might play out and one hypothetical had the real precipice at the point where London, the Fed and exchange bullion were leased out to the point that they only had their theater props of gold and silver veneer bars of tungsten and lead left that could not be shipped out to be recast as kilo bars by the East.

Nah..  that’s a crazy thought.

shovelhead's picture


Tis only one of the goblins lying in wait as we go whistling past the graveyard.

The goblins are Legion and all vie to be first to feed.


shovelhead's picture

So John,

I take this article to mean that spending more than you earn year after year will not end well.

My Dad told me that too, but he didn't have a PhD. in Econ.

Obviously we need more economists for a positive outcome.



fishdicks's picture

I used to ignorantly assume America would be remembered as a haven for freedom and rights. Now it looks like we'll be remembered for crashing world economies with our fiat currency and colossal Ponzi schemes. I've been reading up on the coming Agenda 21 and that's not exactly instilling confidence either.

Diogenes's picture

Remembered is right. You used to be great. What the hell happened.

rjs's picture

first chart looks impressive, but it's just a 2 1/2 per annum growth rate between 1981 & 2009...