"An Economy Built On An Illusion"

Tyler Durden's picture

From an op-ed by George Melloan, posted in the WSJ, and can be read in full here

The Fed's Asset-Inflation Machine

Asset inflation often produces something called "wealth illusion," the belief that pricier asset holdings necessarily make one permanently richer. Illusions are dangerous. Eventually, painful reality intervenes.

* * *

President Obama and Mr. Bernanke worsened the effects of the 2008 crash by adopting the same Keynesian antirecession measures—fiscal and monetary "stimulus"—that had failed before, most dramatically in the 1970s. Stanford economist and former Treasury official John Taylor recently argued persuasively on these pages that "stimulus" measures had retarded rather than speeded recovery.

Mr. Bernanke will have great difficulty letting go of the near-zero interest rate policy without severe consequences for both the Fed and the economy. The Fed's own economists recently warned that the Fed itself could lose as much as $100 billion on its vast portfolio when bond prices finally fall from their artificially elevated levels. Meanwhile, higher interest rates will cause the cost of financing government debt to skyrocket.

The Fed policy of quantitative easing is designed to rebuild the asset inflation edifice that collapsed in 2008. German banker and economist Kurt Richebächer provided some of the earliest warnings of the dangers. In his April 2005 newsletter, he wrote that "there is always one and the same cause of [asset inflation], and that is credit creation in excess of current saving leading to demand growth in excess of output."

Richebächer added that "a credit expansion in the United States of close to $10 trillion—in relation to nominal GDP growth of barely $2 trillion over the last four years since 2000—definitely represents more than the usual dose of inflationary credit excess. This is really hyperinflation in terms of credit creation." Richebächer died a year before the debacle of 2008. The crash that surprised so many bright people wouldn't have surprised him at all.

The rising Dow is of course good news for savers, who have been forced into equities to try to find a decent return on investment. Thanks to Fed policy, "safe" 10-year Treasury bonds yield a near-zero or negative return, depending on whether you measure price inflation at the official rate or at higher private estimates.

Winners on stocks or land holdings should happily accept their gains as the best to be expected in a very unsettled financial environment. But they should also remember the 2000s, when so many people thought their newfound riches were real and cashed them in for yet more debt, such as home-equity loans.

They later had a rude awakening. The "wealth illusion" of asset inflation is seductive, which is why central banks in charge of a fiat currency and subject to no external disciplines so often drift in that direction. Politicians smile in satisfaction and powerful Washington lobbies cry for more.

But an economy built on an illusion is hardly a sound structure. We may be doomed to learn that lesson once again before long.

* * *

And visually:

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Muppet Pimp's picture

We need all the shit that congress approves to go into a queue (not funded yet), and then have them vote on the importance of each.  The mechanism to fund these items should be ran like a business.  OK, you want all this, well taxes go up this much to pay for it.  Something tells me the wish list will shrink when people realize what it costs (assuming baracks 47% have to actually pay something for these freebies they want).  Start with 12% deficit, next year 9, then 6 then 3.  Let them have 3 and the fed eats all the paper it has bought so far.  Or something.

Cheesy Bastard's picture

Remember this;  If you do not hold it, or cannot defend it, you do not own it.  This will be the first rule.

ForTheWorld's picture

Disturbing, to say the least. Such is reality however.

Half_A_Billion_Hollow_Points's picture



haha... exhibit 5 presumes "western world tightened monetary policy"...  which reality does this guy live in?  


wtf next please

ACP's picture

Yeah all I have to say about any of this is:

"No one gives a shit until the shit hits the fan."

True, no?

TruthInSunshine's picture

 "The rising Dow is of course good news for savers, who have been forced into equities to try to find a decent return on investment."


I sort of stopped reading the article at that sentence as it triggered my automatic bullshit meter.

Savers, forced into equities? Really now?

Retail participation in this POMO-steroidal juiced rally has been seriously lacking, and savers being forced into equities....what's that about? If a saver is "forced" into equities, they're no longer a saver, but a speculator, or more accurately, a pure, unadulterated gambler, in these "markets."

Good luck to all such "savers" (wherever they may be) when the crash cometh.

This guy needs to have another fifth of whatever he's been drinking. Bottoms up, George!

YBNguy's picture

Just wait, the DOW will replace God in the textbooks. After all a three letter revision is cost saving.

All Risk No Reward's picture

The more society produces physical wealth, the more impoverished society becomes.

Do you know why?

Debt Money Tyranny


401K of Dooom's picture

MrX, thanks for the memeories.  Brings back happy thoughs that I had watching the Los Angeles riots back in 92.  Heck I remember the recriminations about the four officers and the end result of their trial.  Now contrast that with all the great things going on about our society.  A I want to make couple of points:

1.)  Four years later, Black america achieved it's revenge with the OJ Simpson trial result.  Don't tell me that the Cacausian Jurors actually made a fair and objective decision on Simpson's guilt.  They where thrown into a corner of the room and told to vote to acquit.  I also remember talking to a Cacausian woman and she said that she though Simpson was innocent.  No, she was not an idiot rather she was evil.  The kind of evil that emanates from society.  Oh and don't forget that Robert Kardashian was introduced and his daughters then took up the cause of degrading Western Civilization after that.

2.)  Strange how people will view an event.  After the LA riots of 92, many people where calling them an uprising.  I wonder what those people think of it now?

3.) This video was great!  Romney should have used this in a television commercial.  Just think, Romney's voice narrating thirty seconds of the LA riots:"That's right folks, this is what we will get with another four years of the Obama administration.  You better get the shelter ready and keep your ammo & guns safe!"  I know the media would have gone apeshit but it would be great to stick it to them on this.



Antifaschistische's picture

Remember this too; even if you hold it, if you are subjected to the alternative of taxation of that which you hold, or confiscation by TPTB....then, you only hold it...you don't truly own it.

This is why we buy gold, silver, rhodium, palladium, copper, nickel and other assets with cash that the government does not know we have.   It's the hidden wealth that will matter in the future.  Everything not hidden....wil be pillaged by the tax man.

CH1's picture


Let it go my friend, they are your oppressors. Putting your hope in them is like petitioning bears to leave the salmon alone next year.

They will continue to do whatever they want to you, so long as you stay inside their slave game.

caconhma's picture

Another view of China's economy and its future.


"... There are many other factors that allow analysts to predict an upcoming stagnation of the Chinese economy. Among them, for example - increase the social burden on the budget, due to the aging population, the decline in foreign investment due to the crisis, etc., etc., etc..


After all, again - experts have seen it all. This has already happened, for example, in Japan, the first of the "Asian tigers" created economic miracles, and now Japan does not know how to deal with these miracles’ hangover.... "



This description is in a full compliance with the Holly books of the “liberal/democratic” monetarist totalitarian sect. However, this does not take into consideration few vital things:


1) Social obligations and wage growth - is not only "a loss of competitiveness," but it is also contributing to a domestic demand growth.

2) Japan is not suffering the consequences of their own economic miracles. No, instead Japan became a victim of predatory economic bubbles organized by U.S. banksters in the late 80's.


Indeed, China's growth rates have actually decreased and will continue to decrease even more as their standards of living will keep growing. But China’s growth will become more qualitative (we can see it already). This growth will not come from the ruthless exploitation of low-cost slave labor force and the environment but due to the growth of domestic demand, improved the quality of life of the Chinese people, and growth of labor productivity (and not just its numbers). Actually, this is already happening.


American banksters already several times tried to inflate Chinese economic bubbles, similar to what they have done in Japan. This way, these vampires would be able to suck out all "blood" out of Chinese economy and its growth transferring it to these vampires, as it has been done in Japan. It did not work out this way. They were repeatedly stopped by Chinese regulators and, consequently, there banking vampires have lost big money (instead, this money went to China's economic development being invested into stocks and bonds but they were prevented from inflating the intended bubbles).


There are the China Communist Party and many bureaucratic and corruption issues associated with it. This is the China primary issue. Whether China Communist Party can reform itself will determine the China future.

Accounting101's picture

Or everything is rising! We live in a long hallway filled with mirrors. Everything is fake, yet it is all real. TPTB will not let their system fail.

A Nanny Moose's picture

CONgress is not smart enough to oppress. They are but puppets to make you feel as if you have a voice.

LongSoupLine's picture

At this rate it's just a matter of fucking time before every central banker is hanging by their fucking balls and betten with fucking sticks in the public square.


Fucking pieces of subhuman ass juice.  Fuck off and die Bernanke you stinking bank ball juice licking asshole.

Joe moneybags's picture

You're not really the Limerick King, are you.

LongSoupLine's picture

There once was a Bernank from Fed

Who's fiat stunk like the dead

He fucked taxpayers up the ass

Soon we'll pay $10 for gas

that fucker needs a gold brick through the head


Nope, not the Limerick King.

Fuck you Bernanke.


Yen Cross's picture

Long Soup Line (kicks ass) +3

bobthehorse's picture


We have a bullshit economy.

And we're in a depression.

But we've been in depressions before.

We'll eventually climb out of the hole.


falak pema's picture

the economy IS the market and the market is...oh well, lets ask Alice or the fairy queen or wizard of oz, or...yikes, mephistooo! 

Its like the ball queen scene in Carrie...

Carrie au bal du diable (1976) - IMDb

dick cheneys ghost's picture

I dont know which lies to believe anymore

Deacon Frost's picture

Believe this,

Hyperinflation is the terminal stage of any fiat monetary system. In a fiat currency system, the value of money is based on confidence and scarcity, and once that confidence is gone, money becomes irreversibly worthless, regardless of it's scarcity.




zerotohero's picture

I wish The Fed were a fucking illusion and disappear.

Manthong's picture

“the Fed itself could lose as much as $100 billion”

That’s if reality reasserts itself gently, but I think this chain is yanked so tight that the snap is likely to cut everything to shreds.

knukles's picture

Declare every holding Level 3 or refrain from reporting for reasons of National Security.

Both of which can be done, "legally".  I did not say morally and ethically correct.

The whole world is an illusion, smoke and mirrors.
There is a matrix represented by the government(s) parties, monied interests and "free" press supported by Free Shit in the form of Bread and Circuses.
All backed by the tip of the spear, authoritarian threats of violence.

Bernays outlined the simple model in Propaganda, the natural extension of the "illusion" from sales to marketing into perceptions management culminating in propaganda, immortalized by the Big Lie. 
And it's all real.
Around you 24/7/365

Illusion, lies, deceit, half truths, errors of omission and commission....  None of which are meant to provide the truth. 
News is meant to be hidden, the rest is all entertainment and programming.

Indeed, it has become tiring and draining to assure oneself that one is seeing clearly.  We not only fall into others rabbit holes, but create our very own, for we all have belief systems and defer to normalcy biases and reaffirmation.  Why else would we all be here at The Hedge instead of HuffPo?

The world in which we live, truly exist, is Orwellian in nature, needing no sustenance, feeding, care or attention,  It is the Leviathan itself comprised by definition of all the singular parts including you and me.  If one thinks of one's self as exempt therefrom, one's very ego has been subsumed thereby, by definition..  Large, omnipresent, cunning baffling and powerful, easily taken to redacted and directed history.
Of which we are a part.  Not separate, distinct, above and/or superior to.  A part.  One amongst many. Another very small cog....

Question everything.
Assume nothing.
Plan for the worst, pray for the best.

The single most effective path to comprehending and effectively dealing within such is to not strive to understand "it", but to first understand one's self.  Which is the most difficult journey of all.


Deacon Frost's picture

Also Zbigniew Brzezinski (CFR member), the national security advisor under President Carter, wrote in his book ‘Between Two Ages: America’s Role in the Technocratic Era’ (1971). He states “In the technetronic society the trend seems to be toward effectively exploiting the latest communication techniques to manipulate emotions and control reason.  Human beings become increasingly manipulated and malleable…The technetronic era involves the gradual appearance of a more controlled society. Such a society would be dominated by an elite, unrestrained by traditional values. Soon it will be possible to assert almost continuous surveillance over every citizen and maintain up-to-date complete files containing even the most personal information about the citizen. These files will be subject to instantaneous retrieval by the authorities."

fonzannoon's picture

"The single most effective path to comprehending and effectively dealing within such is to not strive to understand "it", but to first understand one's self. Which is the most difficult journey of all."

 - knukles

Just when we thought we had a pure and simple hero, a millionaire athlete who gave up wealth and fame to become the ideal patriot, to make the ultimate sacrifice, his friends and family complicated everything. They turned Pat Tillman into a human being Monday, showing us what was really lost during that ambush in Afghanistan, insisting that we question every assumption we've made since he died an icon on April 22.

Yes, there were uplifting tales, moments when tears and pride swelled in everyone watching Tillman's memorial service at the San Jose Municipal Rose Garden. There were jarring moments, too, and they carried the message of the afternoon -- "challenge yourself" -- more powerfully than those laden with conventional inspiration.

Tillman's youngest brother, Rich, wore a rumpled white T-shirt, no jacket, no tie, no collar, and immediately swore into the microphone. He hadn't written anything, he said, and with the starkest honesty, he asked mourners to hold their spiritual bromides.

"Pat isn't with God," he said. "He's f -- ing dead. He wasn't religious. So thank you for your thoughts, but he's f -- ing dead."

What? This didn't happen for God, as well as country? A professional athlete turned soldier, and we're supposed to believe that he'd have no use for piety? Robbed of a cliche, where does that leave us?

Challenge yourself.

His brother-in-law and close friend, Alex Garwood, described how Tillman handled his duties when he became godfather to Garwood's son. He came to the ceremony dressed as a woman. Not as a religious commentary. He was doing a balancing act.

"We had two godfathers, no godmother," Garwood explained. And what NFL player turned Army Ranger wouldn't don drag to make that math work?

Who on earth was this guy?

He was the same person who often talked late into the night with his linebackers coach at ASU, prying apart stereotypes about college football players and future soldiers.

"He talked about gays," Lyle Setencich, the former ASU assistant said. "He asked me, 'Could you coach gays?' " Setencich told Tillman yes. He could, and he had. He repeated that at the memorial service, televised on ESPN, in front of the sports world, showing another side of a coach, another side of an American hero.

Challenge yourself.

Tillman talked about everything, with everyone. According to the speakers, he had read the Bible, the Koran, the Book of Mormon, Ralph Waldo Emerson, Henry David Thoreau, and he underlined passages constantly. Garwood recalled how he'd mail articles to friends, highlighting certain parts and writing in the margins: "Let's discuss." A quotation from Emerson, found underlined in Tillman's readings, adorned the program.

It concluded with this: "But the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude."

Yet he was a team player. When the Arizona Cardinals lost their kicker early in a game, Tillman cut into a conversation between the team trainer and head coach Dave McGinnis. "You know who's kicking off for us now, don't you?" McGinnis said, quoting Tillman, a safety who had no real credentials for the kicking job. Most pro athletes wouldn't risk humiliating themselves that way.

"Pat didn't want to be the focal point, but he liked being out front," McGinnis said, "if that makes any sense."

Tillman's roommate in the pros, Zack Walz, took a newspaper clipping to the podium and read about how he and some Cardinals teammates had made up faux dog tags for themselves, declaring their unit a band of warriors. "Soldiers, battlers, lay it on the line," Walz said, sniffling as he scanned the clip. "What the hell did we know? Listen to the words. Listen to the metaphors. ... How hollow they ring."

When Tillman came home late last year from his first tour of duty, Walz said that he understood the difference now, what genuine war and real dog tags meant. A couple of weeks later, he received a gift in the mail, Tillman's dog tags.

"I'm holding them in my hand now," Walz said, "but they will never be this far from my heart again."

Tillman's respect for his former teammate holds another lesson. Since he died, it has been fashionable to contrast his sense of duty with the petulance and inflated sense of importance in modern athletes. Still, Tillman was an athlete as much as he was a soldier.

It has been said over and over that he wouldn't want to be revered while we ignore the other soldiers lost in Iraq and Afghanistan. Would he want his former friends in football belittled, their values bashed as a way to measure his sacrifice? That's too easy.

Challenge yourself.

By the time the ceremony ended, after his brother and brother-in-law sipped the Guinness that Garwood poured in Tillman's honor, the funny, thinking, wild, crazy man had come to life. The family's loss, the loss of every soldier's family, seemed more real.

Tillman wasn't an icon anymore. He was a man you wanted to know, to spend time with, to lift a Guinness alongside. But that had become impossible, the price of war, because his brother was right. Pat is dead. He's f -- ing dead.

Read more: http://www.sfgate.com/sports/knapp/article/True-hero-athlete-Day-s-theme-Challenge-3324427.php#ixzz2KGyw1SD2

Its_the_economy_stupid's picture

Everytime you speak, I learn somedthing.....well, almost every time.

marathonman's picture

What does it matter if the Fed loses money on its balance sheet?  What does it really matter?  It's all BS.

fonzannoon's picture

it's too late. now we just sit back and watch them figure out ways to keep rates down while pumping the market up. i thought it would be interesting but it's boring as hell.

NoDebt's picture

You should buy some stock.  I mean, if you really believe the Fed can eternally make the market go up, why not?

Somehow, I think you know it's a fools game, as I do.  When the SHTF, the government will just TAKE.  From everywhere, including the market and bankers and little old ladies and everyone.  It only requires a sufficient level of desperation on their part.  When the king is in check, lesser pieces will be sacrificed.  All of them, if necessary.

Yen Cross's picture

 +1 Fonz. When inflation drives the serfs into the streets, mark to market will return.

ersatzteil's picture

So the Bernanke is an Economic Illusionist. I hope he's around when I raise kids, pulling quadrillion-dollar notes out of his beard would make for one hell of a birthday magic show.

q99x2's picture

What a coincidence. I'm watching the Matrix trilogy. I paused it to read this article. Neo Thomas A. Anderson the One will save us. Not to worry.

Cheesy Bastard's picture

Please, take the red pill.  The red one.

Floodmaster's picture

Mr. Bernanke work for Canadian/Australian people.

jonjon831983's picture

Here's some more illusion - food security/inflation:

Now they found horsemeat in UK lasagna (not that it'd be a surprise).


Deacon Frost's picture

The commentator Max Keiser makes the point that the adulteration of horse meat in beef products is a disguised form of inflation.

Imminent Crucible's picture

All your horsemeat are belong to us.

Yen Cross's picture

    I watched most of those. Bloomturd had a writeup with Bill Gross and Jim Rogers. I'm still perplexed.?

 Here is the link; Jim Rogers Joins Bill Gross Warning on Treasuries - Bloomberg

new game's picture


some very large problems with that bet:

timing and staying power


when/if you win that jackpot

i wonder if the banking collapse(that must result) will allow you to get your digital fiat

you win but lose...


BigJim's picture

I agree... seems to me shorting US Treasuries is the 'end of the world' trade. Yes, eventually, they'll go to zero... maybe not nominally, but in real terms. But the Fed will defend them til their last dollar, and they have very deep pockets.

Griffin's picture

There have been lots of people that would not have been surprised to see how things have turned out, but unfortunetly while everything seems to be going well, not many notice or take seriously what they are saying.


More of this kind of thinking might help.

matrix2012's picture


That video is excellent... every one better takes a close look on it


Carl Sagan was and still is, an amazing inspiration to many people around the world. He was not only incredibly intelligent, but presented the mind boggling information to us in a way that everybody could relate to, everybody could understand and anybody could appreciate. He was the kind of man that makes the world a better place for having been in it and I for one, am thankful for the knowledge and wonder of this great cosmos that he instilled in me. Try watching his series Cosmos.

mjorden's picture

Illusion? you call this iPod an illusion? you call going long the EUR/USD an illusion? you DARE call my 'faith and credit' in the United States dollar an illusion? ... HOW DARE YOU!

Town Crier's picture

"The Bhagwan Shree Bernanke is evolved beyond illusions such as material wealth and time itself, as in 'the bill for all this stuff will someday come due,'" explained the laughing, bearded acolyte.  "Why shouldn't he have a Rolls Royce for each day of the year?" asks a young woman among the throngs of his loving followers known affectionately as "the Sheeple," clad in a beautiful red jumpsuit uniform, walking on the dirt path to a "levitation" meditation guided by the Baghwan, explaining further with a smile, "The goal is to levitate the entire planet."  Watch this site for event announcements involving The Bhagwan, and his belolved assistant, The Maharishi Krugman Yogi.