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Guest Post: Why Central States/Banks Inflate Asset Bubbles, And Why They Implode

Tyler Durden's picture


Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Inflating phantom assets to collateralize expanding debt is failing due to diminishing returns on stimulus, zero-interest rates, money-printing and monetization of Federal debt.

That the policies of central states and banks have led to one disastrous asset bubble after another over the past 15 years is undeniable. This poses the question: is this serial bubble-blowing intentional, or are the bubbles merely unintended consequences of the neoliberal, neofeudal model of financialization that dominates global finance?

The answer boils down to this: inflate assets or die. The only way to support consumption in an era of declining wages is to enable more borrowing, and the only way to enable more borrowing is to:

1. Lower interest rates to near-zero so stagnant income can leverage higher debt

2. Inflate assets to create phantom collateral that can then support additional debt.

Central states live off taxes skimmed from wages and profits. If wages are stagnant, the state needs profits and capital gains to rise to support higher tax revenues.

In other words: inflate assets or die.

The entire scheme of generating GDP with more and more debt now yields diminishing returns.

Unfortunately for the central states and banks, though their unprecedented fiscal stimulus and money-printing has doubled the stock market off its 2009 lows, efforts to reflate housing have been tepid at best.

This matters because only the top 10% own enough stocks and bonds to make a difference in household net worth, while two-thirds of households own a home. Inflating another asset bubble in stocks was nice for the financial Aristocracy and their technocrat-class, but it didn't do much to boost the net worth of the bottom 90% or enable more borrowing.

Let's look at some charts that reflect the failure of massive money-printing and credit expansion to actually boost wages and household borrowing.

First up: real income (adjusted for inflation) has been flat to down since 2000:

Meanwhile, the ratio of household net worth to total credit market debt owed has plummeted, meaning that debt is rising much faster than net worth. This is called debt saturation: adding more debt generates less and less expansion of wealth.

Cheap credit and financialization has boosted stock valuations far above the real economy, as reflected by the GDP. This chart shows just how disconnected stocks have become from the real economy.

We can see this same expansion of asset valuations in global assets, which quadrupled in a mere 17 years (1990 - 2007) of financialization and bubble blowing:

The diminishing return on stimulus and credit expansion is revealed by money velocity, which has fallen off a cliff:

The Fed has gone all-out to lower interest rates to near-zero and mortgage rates to historic lows, as well as monetize Federal borrowing via purchasing Treasury bonds (Chart courtesy of

Despite these unprecedented measures to boost asset valuations and borrowing, household debt expansion remains below zero: debt is declining faster than it is being created, i.e. deleveraging.

The central state has tried to prime the debt pump by taking up the slack left by private-sector deleveraging by ramping up massive public-sector borrowing:

This has created structural deficits as tax revenues--despite the tailwind of highest-ever corporate profits and a stock market that more than doubled in four years-- are far below spending.

Unfortunately for Central Planners, all their unprecedented efforts to reflate the housing bubble's phantom assets are not getting much traction. What did they expect in an economy with 19 million vacant dwellings and declining real income for 90% of households?

Bottom line: inflating phantom assets to collateralize expanding debt is failing due to diminishing returns on stimulus, zero-interest rates, money-printing and monetization of Federal debt. Once debt stops expanding, the house of cards that is dependent on ever-expanding debt collapses.


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Thu, 02/28/2013 - 11:36 | 3285793 buzzsaw99
buzzsaw99's picture

The current bubble is epic.

Thu, 02/28/2013 - 11:44 | 3285812 Xibalba
Xibalba's picture

Doin all they can to pop the Gold and Silver 'bubble'...But the damn thing won't pop!  How do you pop a shiny rock anyways?  

Thu, 02/28/2013 - 11:49 | 3285832 Chuck Norris
Chuck Norris's picture

When the debt bubble bursts, will it better to have cash on hand or gold/siver?

Or ammo?

Thu, 02/28/2013 - 11:50 | 3285836 Divided States ...
Divided States of America's picture

They do it so Bankers can rape the sheeps on the way up AND on the way down.

Thu, 02/28/2013 - 11:54 | 3285851 Rip van Wrinkle
Rip van Wrinkle's picture

I might be able to buy some ammo with gold or silver.


I might be able to wipe my arse with cash.

Thu, 02/28/2013 - 12:08 | 3285921 Go Tribe
Go Tribe's picture

All three. Cash for immediate needs, gold and silver for medium to longer term needs. Ammo to safeguard it all and supply fellow patriots.

Thu, 02/28/2013 - 14:01 | 3286499 derek_vineyard
derek_vineyard's picture

1.88% 10 year yield shows how inflated the choices for 'investment' are. 

Thu, 02/28/2013 - 11:50 | 3285838 agent default
agent default's picture

Nope.  They are past the occasional gold and silver price hammering.  They are attacking the sentiment in the PM market through constant pressure on the prices.  Someone is getting beyond desperate.

Thu, 02/28/2013 - 12:40 | 3286113 SAT 800
SAT 800's picture

I'm glad you mentioned that; the "great downdraft" at the Comex just failed; the bottom is in in the metals. If the Euro goes down hard this year; Gold could go to $2000 by Thanksgiving.

Thu, 02/28/2013 - 17:32 | 3287663 lasvegaspersona
lasvegaspersona's picture

FOFOA believes the paper market is stuck....can't go up or down or the system will collapse (private communication). Paper 'gold' depends upon entities wanting to hold it for reasons other than systemic collapse. As Santelli pointed out yesterday.....holding paper in a collapse does not do one any good in a collapse and real physical gold does....but the market price of gold is the paper price for now. The problem with the POG lies in the unwillingness of all market forces involved to hold paper 'gold'. There is no problem for those of us holding the metal for it's best and highest use....long term store of value and security...Sooooo...relax, enjoy the lower price and chuckle along as the paper market price folds. 

The real wager I'm wondering about is how low will it go until physical cannot be ANY price.

Thu, 02/28/2013 - 11:45 | 3285817 Bicycle Repairman
Bicycle Repairman's picture

The FEDS have more weapons at their disposal besides mere printing of money.  Suppose 2008 was a planned event and they aren't planning anymore such "events".

Thu, 02/28/2013 - 12:18 | 3285971 Xibalba
Xibalba's picture

 FEDS have more weapons.  <---- and cops, and they are above the law

Thu, 02/28/2013 - 12:34 | 3286072 Bicycle Repairman
Bicycle Repairman's picture

There is no Freikorps in the USA.

Thu, 02/28/2013 - 12:04 | 3285901 insanelysane
insanelysane's picture

I believe it all has to do with Quid Pro Quo, whatever the hell that means.

Thu, 02/28/2013 - 12:15 | 3285953 Bastiat
Bastiat's picture

this for that

Thu, 02/28/2013 - 12:46 | 3286145 SAT 800
SAT 800's picture

Ah, Bastiat. He had a "beautiful mind"; and you can read his works at the Von Mises Institute website for free. A great opportunity.

Thu, 02/28/2013 - 12:31 | 3286051 DavidC
DavidC's picture

Bubble? What bubble? I see no bubble...


Thu, 02/28/2013 - 12:44 | 3286131 SAT 800
SAT 800's picture

Epic, perhaps, but hardly new. The French destroyed their own currency twice in the same century; destroyed as in 50,000,000 whatniks for a gold coin, or whatever. And now their experiment with the Euro is beginning to smell. But it'll probably take awhile longer to fall apart.

Thu, 02/28/2013 - 11:36 | 3285794 swiss chick
swiss chick's picture

Que du bonheur /sarc

Thu, 02/28/2013 - 12:02 | 3285890 Frozen IcQb
Frozen IcQb's picture

Comment les suisses réagissent t-ils a la dévaluation du Franc?

Avez-vous des sites hors-médiatiques similaires à zerohedge que nous puissions lire?


Thu, 02/28/2013 - 11:42 | 3285800 francis_sawyer
francis_sawyer's picture

Accidental money skimming by well intentioned 'do-gooder' jewish banking academics striving for EQUALITY above all things...


It's GOD'S WORK taken to the next level... 

Thu, 02/28/2013 - 12:00 | 3285884 Divided States ...
Divided States of America's picture

It will be even easier now with an all jew US Banking Cartel (Welcome Lack Jew, Bernanke, Blankfein, Fink, Gensler, Yellen, Krugman ......... fuck I could go on for days)

Thu, 02/28/2013 - 12:20 | 3285977 francis_sawyer
francis_sawyer's picture

Working tirelessly & diligently to achieve full employment & price stability...

Thu, 02/28/2013 - 11:42 | 3285804 JustObserving
JustObserving's picture

It is inflate or default.

The Fed will never permit default since it will be the end of the Fed.  

Better to have most of the people in poverty than to have the oligarchs lose some of their wealth. It has always been fascism masquerading as democracy.  Drink that fluoridated water, eat the mystery meat,  and enjoy the entertainment.  

Thu, 02/28/2013 - 12:09 | 3285927 SAT 800
SAT 800's picture

Yes, but "masquerade" implies a costume and mask. At this point everyone who is even marginally conscious and willing to face, or think about, the reality of the situation, knows that it's fascism. I prefer to say it's re-named "democracy". Just keep repeating democracy, democracy, democracy, and everyone will roll over and go back to sleep. It's State-Corporatism-Financial-Dictatorshiip, with just the thinest layer of semi-transparent makeup.

Thu, 02/28/2013 - 14:59 | 3286807 Clark Bent
Clark Bent's picture

Slavery is the new freedom. 

Thu, 02/28/2013 - 11:41 | 3285806 dbTX
dbTX's picture

The Fed's ability to continue wiring zero's to the TBTF banks is coming to an end, the exit strategy is non existant.

Thu, 02/28/2013 - 11:42 | 3285810 Weisbrot
Weisbrot's picture


Lots of articles about lots of things and yet somehow the Government seems to keep it all together -

kudos to them - ok for us too



Thu, 02/28/2013 - 11:44 | 3285813 francis_sawyer
francis_sawyer's picture

Really?... 'the Government' is keeping it all together... That's nice...

Thu, 02/28/2013 - 11:46 | 3285822 Bicycle Repairman
Bicycle Repairman's picture

Committee to save the world, bro.  Don't get off the boat.  <snark>

Thu, 02/28/2013 - 11:51 | 3285828 francis_sawyer
francis_sawyer's picture

the only thing that 'the Government' has done right is to have kept the Kardashians & Honey Boo Boo off the drone kill list...


But I have a nagging suspicion that the day they actually decide to pull the plug on the USD, they actually will drone Kim Kardashian [thus putting the collapse of the dollar buried on page 7]...

Thu, 02/28/2013 - 12:27 | 3286019 SAT 800
SAT 800's picture

Isn't it amazing? That's the default opinion created by the mass propaganda machine. Orwell would have been proud. Night is Day and Day is Night. Of course, Reality is a little difficult to face; to wit, The Government is actually a usless and broken machine that existed in the first place to steal from you.

Fri, 03/01/2013 - 05:28 | 3289359 Notarocketscientist
Notarocketscientist's picture

Like a crack whore who is still awake after 48 hours on the pipe who's still suckin any bone that will feed her a line is 'keeping it together'

Thu, 02/28/2013 - 11:47 | 3285826 swissaustrian
swissaustrian's picture

Reminds me of comments given by citizens of Eastern Germany to a Western TV reporter when I visited that country in 1988 (one year before the collapse).

They all talked about how great the country was and so on. Problem was that there was a guy from the secret police standing behind the camera. You could see the fear in the eyes of these poor people.

Thu, 02/28/2013 - 12:14 | 3285948 SAT 800
SAT 800's picture

It didn't "collapse"; Gorbachev sold it back to West Germany for dollars he desperately needed to pay off due bond payments. Financial distress is often very significant in modern history; the reason Jefferson was able to buy the Louisianna Purchase from France; is that France was flat stoney-assed broke.

Thu, 02/28/2013 - 12:32 | 3286057 francis_sawyer
francis_sawyer's picture

They had run out of the "cake" that Marie Antoinette had offered them to eat...

Thu, 02/28/2013 - 12:36 | 3286083 SAT 800
SAT 800's picture

Something like that.

Thu, 02/28/2013 - 15:03 | 3286831 Clark Bent
Clark Bent's picture

Or like killing everyone for a decade, using fiat money, and then Napoleon and his activities. Slaughtering the Ancien Regime and the Church had no positive effects on the bottom line. 

Thu, 02/28/2013 - 17:10 | 3287590 francis_sawyer
francis_sawyer's picture

Napoleon was funded by Rothschild... nuff said...

Thu, 02/28/2013 - 13:02 | 3286220 Sandmann
Sandmann's picture

The GDR was bust in 1972. It depended on West German Loans and cheap Soviet oil to keep going. It sold the oil to the West for Forex and burned lignite to keep the lights on

Thu, 02/28/2013 - 13:11 | 3286269 Mike in GA
Mike in GA's picture

France was "stoney-assed broke" because their currency had been printed far beyond the collateral behind it.  Its currency collapsed into nothing just prior to the LPurchase. 

Collateral, if, like me, you have trouble remembering, is an anachronistic banking term referring to value held against obligation.

190 years later there is a new term - fiat - which makes collateral unnecessary and central banking immune to previously held concepts such as value.

Anything in this ancient history that seems to resonate with our daily headlines is purely coincidental as we all know bankers today are waaay too smart to ever let a little thing like money-printing get em into trouble.

Thu, 02/28/2013 - 12:04 | 3285904 darteaus
darteaus's picture

This economy is together?!

Reminds me of: Guy falls of Empire State Building and says "So far, so good" as he passes each floor on the way down.  Remarks at ground floor remain unknown.

Thu, 02/28/2013 - 15:05 | 3286836 Clark Bent
Clark Bent's picture

I think it was Bugs Bunny who said that it's not the fall that gets you, but the sudden stop. 

Thu, 02/28/2013 - 11:44 | 3285814 swissaustrian
swissaustrian's picture

Constantino Bresciani Turroni - the economics of inflation:

A great book on the Weimar hyperinflation. It seems like the FED is copying the playbook of the German Reichsbank.

Thu, 02/28/2013 - 11:49 | 3285833 Bicycle Repairman
Bicycle Repairman's picture

The FED has many more weapons than an unwanted, alien regime that was trying to govern a nation back from (at that time) the worst defeat handed to a European nation-state.

Thu, 02/28/2013 - 11:52 | 3285845 swissaustrian
swissaustrian's picture

No. They only have a printing press, just a more modern version of it that doesn't require physical printing.

If you only got a hammer, everything looks like a nail...

Thu, 02/28/2013 - 12:02 | 3285894 Bicycle Repairman
Bicycle Repairman's picture

The US has the world's reserve currency, the most potent military ever, the most extensive empire ever, plenty of natural resources within it's own borders and a ruling class free to do what it wants.

Weimar Germany had none of these things and they matter.

Thu, 02/28/2013 - 12:08 | 3285922 adr
adr's picture

and the USA arguably has the stupidest collective population in the history of the world. Having resources doesn't matter if nobody knows how to use them.

Thu, 02/28/2013 - 12:36 | 3286081 Bicycle Repairman
Bicycle Repairman's picture

Apparently some Americans know how to mark them up and trade them.

Thu, 02/28/2013 - 12:31 | 3286050 SAT 800
SAT 800's picture

The Roman Empire was much more impressive. We had an American Century; it's over. "World Reserve Currency" means nothing. Absolutely nothing. It's a phrase. A conditioned abstraction; a matter of loose agreement amongst States; it can disappear over the weekend.

Thu, 02/28/2013 - 12:40 | 3286107 Bicycle Repairman
Bicycle Repairman's picture

Does it really  matter if the Roman Empire was more impressive? 

You under the impression that the American empire will disappear anytime in the next couple of years.  That's extremely unlikely.

I don't care for the empire, but to say that collapse is pending is off base.


Thu, 02/28/2013 - 13:00 | 3286211 Sandmann
Sandmann's picture

The British Empire was much more impressive than the Roman Empire but it still blew itself apart trying to take Germany down as a trade rival at a time when Germany feared Russia as an emerging industrial power

Thu, 02/28/2013 - 15:06 | 3286850 Clark Bent
Clark Bent's picture

MDB, is that you? 

Thu, 02/28/2013 - 15:32 | 3287035 Sandmann
Sandmann's picture

The US Military has never fought a major adversary since 1953. It was strung out for decades in Vietnam by footsoldiers and bogged down in Iraq by Irregulars and is tied in knots in Afghanistan. It is simply an over-specified, over-funded technological showroom of overpriced US hardware of which the F-35 is but the latest example. The US will always lose to lands where infantrymen are cheap and disposable and where male birthrates are high - it simply cannot take the losses and seemingly loses more Us soldiers to suicide than combat.

So don't get carried away. Hubris destroys Empires

Thu, 02/28/2013 - 12:34 | 3286064 SAT 800
SAT 800's picture

Yawohl, mein herr. Events will validate your analysis.

Thu, 02/28/2013 - 12:09 | 3285925 Toolshed
Toolshed's picture

The FED IS an unwanted alien regime. And speaking of defeat, the USA is, in reality, facing total defeat in Iraq, Afghanistan, Mali, and anywhere we invade to liberate resources from so called "terrorists". Have we succeeded in any of our wars of choice? Absolutely not. Partly because we have no definition of what success would entail, but mainly because the "terrorists" are doing to the USA exactly what we created them for and trained them to do to the USSR in Afghanistan. They are going to bankrupt the USA in a war of attrition. They will be picking at the USA's carcass long after it has died a slow miserable broke ass death.

Thu, 02/28/2013 - 12:44 | 3286128 Bicycle Repairman
Bicycle Repairman's picture

Many of your points are from your perspective and I have many of the same feelings.  Just because these things look bad from our prespective does not mean that the people who run the show see things the same way.

To compare a defeat in MENA to being occupied like Germany was after WWI is wrong.

Thu, 02/28/2013 - 17:55 | 3287781 lasvegaspersona
lasvegaspersona's picture


Rudolf E. A. Havenstein   ftw

Thu, 02/28/2013 - 11:45 | 3285815 rsnoble
rsnoble's picture

They just aren't allowing people to take on more debt, they are forcing it.  If you want to continue the things you are used to you'll pay for it.  People aren't used to going without.

I also don't believe 'live within your means' as a nation. Ha yeah fucking right this place is gona explode like a fireworks factory on a bad solar flare day.

There is no way it will be anything but complete chaos and those that think they're prepared will be watered down by those that aren't.  Good fucking luck.

Thu, 02/28/2013 - 11:49 | 3285834 rsnoble
rsnoble's picture

There's little signs everywhere as to what's coming, even the water dept secretary in a town of 200 here is sitting behind bullet proof glass now.  And the courthouse is mentioning 'we need to boost security' which is a synonym for 'well sell  your house if you don't keep paying our pension and salaries'.  Fuck public unions.  I'm all for a good life but now when your putting everyone else out on the streets.


Thu, 02/28/2013 - 11:58 | 3285877 adr
adr's picture

I've always lived within my means, must be something wrong with me.

I do have over $100k in available credit. Some days I think about going on a massive splurge and then running into the bank branches yelling "FUCK YOU, HA HA HA".

Of course Krugman would say I would be doing the economy good. Besides it isn't like Chase and BofA would even notice a $100k loss.

Thu, 02/28/2013 - 12:16 | 3285962 rsnoble
rsnoble's picture

Problem is there's several hundred k people for everyone of you.  That's why I think it will be chaos.  When people are starving etc they'll come for those that aren't.

Thu, 02/28/2013 - 15:11 | 3286880 Clark Bent
Clark Bent's picture

Obama's got their back. 

Thu, 02/28/2013 - 11:45 | 3285819 Common_Cents22
Common_Cents22's picture

aren't they just providing liquidity for orderly markets? ;)

Thu, 02/28/2013 - 11:50 | 3285835 Lets_Eat_Ben
Lets_Eat_Ben's picture

Why? To steal our wealth and use it to enslave us...I thought we'd covered this.

Thu, 02/28/2013 - 11:52 | 3285846 Winston Churchill
Winston Churchill's picture

Pricks blowing a terminal bubble.

What could go wrong ?

Thu, 02/28/2013 - 11:53 | 3285850 moneybots
moneybots's picture

"That the policies of central states and banks have led to one disastrous asset bubble after another over the past 15 years is undeniable. This poses the question: is this serial bubble-blowing intentional..."




Greenspan deliberately and willfully engineered a housing bubble.

In 2004, Greenspan told home buyers to get adjustable rate mortgages.  Why would Greenspan say that?  People that coud not afford a fixed rate loan could get a teaser loan that could get them in the market.  Getting everybody in is what a bubble is all about.

In 2004, the FBI warned of massive mortgate fraud.  Anyone think Greenspan was unaware of this warning?  In 2005, Greenspan praised lending practices that allowed people who otherwise could not afford to buy a house, to be able to do so.  In effect, Greenspan was praising mortgage fraud.

The ownership society program was part of the effort as well.  It wasn't some accidental coincidence.

Thu, 02/28/2013 - 12:59 | 3286207 Sandmann
Sandmann's picture

Greenspan deliberately engineering the Dot.Com Bubble that crashed and then created the Housing Bubble to bail out the Banks. The Bubble came from the Y2K Scam.  Greenspan poured oil on every fire to reward his friends on Wall Street. He achieved for China what Mao never could

Thu, 02/28/2013 - 11:55 | 3285858 Quinvarius
Quinvarius's picture

And when the private sector debt defaults begin, that is when you will see the super inflation.  All that money with no debt to pay down...ugly.

Thu, 02/28/2013 - 11:56 | 3285862 Pairadimes
Pairadimes's picture

This is merely the greatest fraud in all of human history, taking place before our eyes, while we watch. The bubbles are just a side effect of such massive theft by currency inflation, and will continue until small red holes begin spontaneously appearing on the foreheads of the public figures running the criminal enterprise.

Thu, 02/28/2013 - 12:00 | 3285887 Super Broccoli
Super Broccoli's picture

uhm looks like we've reached that permanent high plateau !

Thu, 02/28/2013 - 12:02 | 3285895 darteaus
darteaus's picture

Central banks inflate so that hard assets can be confiscated from a distracted populace.

Thu, 02/28/2013 - 12:04 | 3285902 adr
adr's picture

Get your 0 0 0 128 month GM car loan rght here. No income, no problem. Came in for a Chevy Spark, hell no, you get a $50k Tahoe. What? You can't afford the payment? No worries, we'll string out the loan until you can. We've got a sales record to break and with your help we can!!!!

Thu, 02/28/2013 - 12:16 | 3285964 TonyCoitus
TonyCoitus's picture

That's the game being played now.  Cheap auto loans.  Zero interest for 6 0r 7 years.  Bad credit, no credit, bankruptcy, NO PROBLEM.  We'll get you into that new Tahoe with heated and ventilated seats, rear seat DVD's, chrome package, heated steering wheel.  You deserve it, now come and get it.


Fuck you.  I'm driving my Honda till the wheels fall off, just to spite you fucking assholes!  Paying off my house instead.  Ha ha ha.

Thu, 02/28/2013 - 12:13 | 3285946 Stuck on Zero
Stuck on Zero's picture

Time to bring out the often cited (but erroneously attributed to Jefferson) quote:


"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."



Thu, 02/28/2013 - 12:22 | 3285987 SAT 800
SAT 800's picture

I'm sure everything will be alright now that we've elected a Kenyan fathered by a genetic reject alcoholic suicide. By the way, I  am not making this up.

Thu, 02/28/2013 - 12:57 | 3286201 Sandmann
Sandmann's picture

Well how's Kenya doing ?

Thu, 02/28/2013 - 15:16 | 3286921 Clark Bent
Clark Bent's picture

Do you mean Hussein Sr., or Frank Marshall Davis? Oh, never mind.  

Thu, 02/28/2013 - 12:16 | 3285957 holdbuysell
holdbuysell's picture

CHS's last sentence is exactly why Bernanke can never stop printing, no matter how much jawboning takes place. From a flow perspective, he can't even slow the purchases for that would have a similar effect as tightening. In fact, I expect the amount of printing to increase going forward. Watch for events/reasons that require higher amounts to be pumped into the system.

Thu, 02/28/2013 - 12:16 | 3285958 jimmyjames
jimmyjames's picture

Bottom line: inflating phantom assets to collateralize expanding debt is failing due to diminishing returns on stimulus, zero-interest rates, money-printing and monetization of Federal debt. Once debt stops expanding, the house of cards that is dependent on ever-expanding debt collapses.


Bottom line-when a money system dependent on expanding credit fails and the assets/collateral that back the credit money supply vaporize--that would be deflation-

Thu, 02/28/2013 - 12:24 | 3285986 smartstrike
smartstrike's picture

The answer boils down to this: inflate assets or die. The only way to support consumption in an era of declining wages is to enable more borrowing, and the only way to enable more borrowing is to:

1. Lower interest rates to near-zero so stagnant income can leverage higher debt

2. Inflate assets to create phantom collateral that can then support additional debt.


Marx calls this fictitious assets.

 Central banks are not providing ample liquidity to stimulate borrowing as you point out, they do it to support existing debt

Thu, 02/28/2013 - 12:27 | 3286002 IamtheREALmario
IamtheREALmario's picture

There is a reason why, historically, many cultures have outlawed the charging of interest ... and fiat currency... and REQUIRED the periodic foregiveness of debt.

It is only because of the fact that we are out of step with the histoircal learnings that our system requires montary inflation (so that debt greater than the money supply can be paid... although always a step behind) and that corruption is rampant.

The substitute for a system with no interest, real currency and the periodic foregiveness of debt is a system of converting the debt to equity and then periodically popping the bubble, devaluing the equity and writing off the debt...although in the process value has been transferred to those who can create fiat currency/debt from thin air.

One can lookat the historically learned system as a socialogially sound system and the current system as a sociopathic system because our current system propagates the oppression of the working class of people by the financial class of people.

To state the obvious: Labor creates value. Financialization creates no value. Who are the REAL social elite? Obviously those that create REAL value through labor. The financial classes and their hangers-on are parasites that create no value, but insist that they have control.

Thu, 02/28/2013 - 12:57 | 3286199 Sandmann
Sandmann's picture

It is interesting that it is illegal to have a Perpetual Interest-Bearing Trust

Thu, 02/28/2013 - 12:26 | 3286012 Sandmann
Sandmann's picture

We are speaking largely about that Grand Charlatan Alan Greenspan who lobbied to get the Fed job and presided over the Destruction of US as a Creditor Nation between 1987 and 2006. He was the greatest single disaster to befall the American Republic

Thu, 02/28/2013 - 12:40 | 3286116 Bastiat
Bastiat's picture

And the Bernanke was his under-study.


Thu, 02/28/2013 - 12:55 | 3286156 Sandmann
Sandmann's picture


Nice listing....hint, don't look at the top to find USA and UK.  Looks like 1987 the USA had a $2.3 TRILLION National Debt up from $828 Billion in 1979 and by 2006 it was $8.7 TRILLION


Thu, 02/28/2013 - 13:45 | 3286101 socalbeach
socalbeach's picture

I see Charles H Smith still hasn't fixed his Severing the Link graph which shows real (inflation adjusted) GDP vs the nominal Dow, making the graph look much more extreme than it really is.  There are other mistakes in his article as well.  Here's what the graph looks like comparing apples to apples (graph below is on a log scale also).


nominal Dow vs nominal GDP


Thu, 02/28/2013 - 12:49 | 3286159 PeeramidIdeologies
PeeramidIdeologies's picture

What I find painfully hilarious is the phrase " in a time of declining wages ". This statement is thrown around like it is some kind of natural phenomenon. Ridiculous. Yet another symptom of the psychotic level of greed that underpins this whole issue. It is impossible to justify massive bonuses to corporate big wigs, who do not even understand the term "cost of living", when the very base that their "success" was built on is crumbling beneath them.

What exactly is the value of a dollar?

Or perhaps

How many dollar bills does it take to fill a hole?

Thu, 02/28/2013 - 13:04 | 3286232 JR
JR's picture

Keynes took particularly delight in turning the conventional wisdom on its head. And, so, here we are, with the consequences.

Keynes turned to Lenin and Communism to give an accurate diagnosis of how debauching the currency would destroy capitalism.  Which makes it ironic, says Hunter Lewis in his book Where Keynes Went Wrong, that Lenin completely failed to see that inflation was a threat to any economic system and was completely taken by surprise when his own Communist regime became wracked by hyper-inflation in the 1920s.

“This communist inflation raged so uncontrollably that, as Keynes said at the time:

‘In Moscow…if you buy a pound of cheese in a grocer’s shop, the grocer runs off with the roubles as fast as his legs will carry him to the Central Market to replenish his stocks by changing them into cheese again, lest they lose their value before he gets there.’”

In the end, says Lewis, it was the hidden inflation of the 1980s that destroyed the value of the people’s money and itself contributed to the collapse of the Soviet Union.

Ironically, in 1922,  the younger anti-inflationary Keynes, when asked by the German government for advice about how to control its own hyper-inflation, “recommended that the government stop spending so much, balance its budget, and above all stop printing so much money. This was ignored, and prices jumped another 1,000 times over the next year…at one point doubling every 3.7 days. Finally the new head of the Reichsbank, Dr. Hjalmar Schacht, adopted Keynes’s hard money policy and the inflation came to an abrupt end. But by then millions of middle class Germans had been wiped out…”

Thu, 02/28/2013 - 13:10 | 3286274 Madcow
Madcow's picture

Once debt stops expanding, the house of cards that is dependent on ever-expanding debt collapses.


the price of gold - and the performance of the miners especially - is telling us that we've reached the "collapse" stage.  There is no longer sufficient net new cash being created to feed all the previously existing debts, rents, etc. 

Gold no longer believes further "printing" is possible. Instead of "hyperinflation" we'll have "hyper-deflationary-evaporation" which is what everyone assumes just can't happen so long as there are "determined" central bankers at the helm.  

"Conventional wisdom" - that the bankers can keep printing and stop the implosion - is simply wrong. It is a fantasy that gold can move to $20K/oz and then used to discharge debts and reliquify the banking system. 

The mining stocks are saying just the opposite - basically screaming at people - to gain their attention - begging folks to stock up on cash and canned goods. 

Thu, 02/28/2013 - 13:21 | 3286329 gmcniff
gmcniff's picture

The wealth pie is shrinking and anyone capable of increasing it is being discouraged through taxes, class warfare and guilt.

I love how everyone says that if we don't change direction or course, we'll wind up like Greece!  Hah - would that we were so lucky!  I suspect we're on an express train to Detroit.  

Thu, 02/28/2013 - 13:22 | 3286336 reasonisgone
reasonisgone's picture

Bernanke doesnt get it or he is outrite deliberately misleading. Using historical rates of inflation as a way to manage monetary expansion is incorrect. Because the dollar today is the worlds global currency, he does reflate the world but he forgets that the worlds manufacturing base today is not in the U.S. its in Asia. In the past when the U.S. was to a great extent a domestic economy lower interest rates would have created greater demand , more production US based and higher demand for salary compensation fueling inflation. Today lower interest rates  and QE fuel demand for products that are no longer created in the US thereby worsening the trade deficit which worsens the fiscal deficit as a result. We all know that sooner or later the debt situation will explode specially as interests rise, thats the danger of leverage. The debt service will consume a significant part of the budget, then what do we do? Bernake know that but he hides under the mantle of his dual mandate of inflation and employment. Isn't about time he acts like a grownup and we hold him accountable for his share of the deficit so that he makes monetary decisions with the longer term also in consideration?

Thu, 02/28/2013 - 17:37 | 3287681 reader2010
reader2010's picture

Guess the author never bothered to read any classical writings of Karl Marx and particularly the giant's critiques of capitalist economy. Marx famously concluded the accumulation of captial is the accumulation of debt, and that's the only way to accumate capital. 

Fri, 03/01/2013 - 05:32 | 3289364 Notarocketscientist
Notarocketscientist's picture

Bought another 20 grand of gold this week.   And will keep doing same as I accumlate cash.

Fri, 03/01/2013 - 12:46 | 3290527 andyupnorth
andyupnorth's picture

The chart entitled 'Severing the Link" (overlaying the Dow Jones Industrial Average Index with the U.S. Real Gross Domestic Product) indicates that the Dow should slump down to ~800.

I'd like to see the crash happen as abruptly as the 1970 Penn Central Collapse.


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