Guest Post: "The Carrot's In Reach:" The Myth Of A Self-Sustaining Recovery

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The carrot of self-sustaining recovery will remain out of reach, for the policies presented as the path to recovery preclude the "virtuous cycle" everyone desires.

The enduring myth of the post-2008 era is that central-planning money printing and deficit spending would soon spark a self-sustaining recovery. Once consumers and businesses stepped up their own borrowing and spending, the central bank and state would then pare back money printing and deficit spending, as the increase in private-sector spending would fuel further borrowing and spending, i.e. become self-sustaining.

The reality is the mythical self-sustaining recovery is the carrot dangled in front of a credulous public: though we're constantly reassured "we're almost there" (the promised land of self-sustaining recovery), the mythical recovery remains out of reach, no matter how much money is printed or borrowed and blown in fiscal stimulus.
There are several key reasons for this.
1. As noted yesterday, consumption is not investment, no matter how many times you call consumption "an investment." Investment is planting one's seed corn (capital) wisely. Consumption ($300 million fighter aircraft, $70,000 biopsies, McMansions in the middle of nowhere, endless subsidies of housing and banking, etc.) is turning the seed corn into sour mash and indulging in a drunken orgy of squandered debt that cannot and will not be paid back in dollars with today's purchasing power.
2. Borrowing money (debt) yields diminishing return. There's this funny little thing called interest that piles up in a borrowing spree that eventually siphons off much of the debtor's income stream, effectively impoverishing the borrower.
There's another funny thing called mal-investment or mis-allocation of capital: when the borrowed money is nearly free (low interest rates), then even poor quality bets (oops, I mean "investments") get funded. This is especially true if the winnings are yours to keep but any losses you incur are covered by Big Brother--the Federal Reserve or the U.S. Treasury--and the taxpayers the government has indentured to the banking sector.
3. Debt that cannot be written down because that would impair the politically powerful financial sector remains a tightening noose around the throat of the economy. Capitalism requires creative destruction, which includes the liquidation of bad bets and unpayable debt. Since that is verboten in our State-managed crony-capitalism system, the impaired debt remains on the books, supported by endless government subsidies.
Both the phantom collateral and the subsidies derange and distort the markets, leading to further bad decisions as risk has been obscured.
4. As analyst Ramsey Su recently observedIt is obvious that the central banks of the world have printed too much money, (which) all went into the wrong hands and now has nowhere to go. In the oft-propagated myth of central bank intervention, helicopters drop cash into the economy to stimulate demand for goods and services, sparking the "virtuous cycle" of a self-reinforcing recovery.
But the money isn't dropped into households or the real economy--it's dropped into banks, which use it for speculation or funding cronies' speculations and asset grabs. If the Federal Reserve had wanted to do a real helicopter drop of money, it could have sent $10,000 in cash to every taxpayer. Instead, it lavished at least $23 trillion in subsidies, backstops and guarantees on the Too Big To Fail banks and the mortgage industry.
This neofeudal distribution of $7 trillion in new Federal debt to taxpayers and the Fed's trillions in "free money" to the parasitic financial sector has carved out a vicious cycle of lower real household incomes, higher interest payments and new asset bubbles in stocks, bonds and housing. These trillions of dollars in freshly issued money have flowed to financiers who have used it to chase yield in one asset class or another.
As a result of these neofeudal policies, the economy is now perched precariously on the edge of multiple asset bubbles and demographically impossible-to-fulfill promises of entitlements and other giveaways (such as mortgage/housing subsidies and a variety of corporate welfare scams).

The carrot of self-sustaining recovery will remain out of reach, for the policies presented as the path to recovery preclude the "virtuous cycle" everyone desires.

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hugovanderbubble's picture

CH look


hugovanderbubble:[Spain to be downgraded by Moodys to Junk Bond[[not on the wires yet]; Spanish Covered Bond Market completly iliquid- Spanish Subgovernment bonds from Catalonia and Valencia are in default- Counterparty risk higher- Sacyr Vallehermoso (SYM SM EQUITY) and Banco Popular (POP SM EQUITY) are in default. Spain will suffer DEBT HAIRCUTS which means EURUSD has to drop hardly to 1.10-1.15.

King_of_simpletons's picture

DOW is ramping up after a brief "lul".

hugovanderbubble's picture

Hi King,


The problem of DOW INDEX, is that is a price Weighted Index- Very easy to manipulate just transforming the price value and creating OVERCROWDED TRADES, what its already happening.


Other Good short is NIKKEI 


and the first one in my humble opinion is SELL and SHORT any kind of US REIT.  

US REIT( VAST Majority are quoting with 35-50% Premium vs AFFO)...which is aberrant.....The next Crisis..remember= WORLD COVERED BONDS....Specially trapped are all the Insurance Companies.


On the other Hand, French bonds will be attacked cos Spanish Higher Colleteral Required.

BNP will crash on Italy Exposure


The Euro will be fragmented into two. SPLITTED EURO A , and EURO B

smartstrike's picture

Nikkei is going sky high, all the global money is going to end up there.

hugovanderbubble's picture

The problem is the Yen...from a European Hedge or not hedge...


Nikkei is a bubble Im waiting for 9.200-9.600 level to cover during 2013-14

Pinto Currency's picture


You might add "The government's size continues to grow and increasingly impairs economic function."

aint no fortunate son's picture

VIX suppression well under way, agree, green on the day, prolly sparked by another APPL rumor and some FedHead rumor about ZIRP forever due to weak jobs #

hugovanderbubble's picture

Hello Aint,

Meanwhile Central Banks and Algos are the ONLY players in these lIMBO TRADING ENVIROMENT.....Volatility is in dead mode...but any UNEXPECTED EVENT...will made a BIG FORCE SELLING, Specially in VAR SYSTEMS.


I dont see too much sp500 upside from here ....and yes big drawdown...but im just a tiny spanish trader/ not the pro´s over there in the US and UK.


US Equities, except some Biotechs and some kind of stocks(pure growth ones in some subsectors) are Sell...Specially OILERS, DISCRETIONARY CONSUMER, UTILITIES.


and Remember SPAIN is the biggest fraud ever in REAL ESTATE----> this will crash all COVERED BONDS STRUCTURES ACROSS THE WORLD.


SELL ANY SPANISH BOND dont care about the tranch,

LONG Spanish CDS 2, 5yrs.




fomcy's picture

PPT already there running the show. Sh*theads can finish in green again, who need jobs anyways, when you can long DOW :)

duo's picture

For every dollar of interest saved on a car loan or mortgage, 3 are lost from interest income from savers.   What part of this math is so hard to understand?

McMolotov's picture

It's math, buddy. If governments supposedly reflect the people they represent, it's obvious the people know jack shit about math.

Smuckers's picture

Spoiler Alert: The carrot contains horsemeat.

hedgeless_horseman's picture



You're close; the horseshit contains carrots...

Most Americans do not save any money, but they borrow way too much money.  It is not hard to figure out that we are being kept as debt slaves.

Joe Davola's picture

C'mon, sing it with me:

The circle of life,

The circle of liiiiife...

NoDebt's picture

Dammit, Hedge!  You do this shit to me every time right before lunch.  I'm staring down a ham-and-cheese on rye and you post up pics of that awesome home-grown stuff.  I get all bummed out and then I reach for the "comfort food".  One of the Twinkies I bought on eBay for $6000.

prains's picture

hedge those carrots look like you grow them in 50% peat 

hedgeless_horseman's picture



No peat.  Our compost is mostly horse manure, straw, and (unfortuantely) some wood shavings.  Our soil is very sandy.

Chicken and rabbit shit goes directly on certain crops, and cow shit stays out in the pasture.

prains's picture

you're doing amazingly well with that type of soil, kudo's. Sounds a little alkaline as well

hedgeless_horseman's picture



Old pine tree forest, so acidic, and thus the raised beds for most things, except sweet potatoes, blueberries, etc.

Ash from the burn pile helps.

prains's picture

doing raised beds as well this summer, thinking permanent so going concrete walls <less bug attracting> plus good excuse to drink beer shirtless and swear alot around the missus, she loves it...??

Roandavid's picture

Krugman!  You got some splainin to do!

Teamtc321's picture

In the pic above, exchange the puppet tied to the stick with a rat, the carrot for cheese. Bingo, we have a Nobel prize educated economist with some splainin to do.



Spastica Rex's picture

What if growth is over, regardless of what we do? What if there are no more virtuous cycles to be had, regardless of policy? What if the petri dish is at capacity?

Bearwagon's picture

What do mean, "what if"? Look out the window!

TotalCarp's picture

See i dont quite buy that.. I mean the point of this is - if you try to arest the business cycle on the down swing (delevering, censing, however u wanna call it) then the upswing will never come. Growth can come back but first the downswing has to happen.

The longer it is delayed the uglier it will be. Sadly in a democracy mostly ex lawyer politicos arent looking past the next 2-3 years. Chess masters they certainly aint.

Zero Debt's picture

At this point the vicious circle is entirely self sustaining. Adding more intelligence and resolve to it will only accelerate the spin.

Itch's picture


What music/song best describes the following markets, respectively; Yen, Gold, S&P.

My contribution;
Yen;  Prokofiev toccata

Gold; Every thing in its right place.

S&P; Didnt we almost have it all, Whitney Houston.

takeaction's picture

Just listen to Liesman...he is a 100% Obama shill..."It was not the Sequester"...Fuck you LIESMAN...I know you are reading this...we are on to you.

ThisIsBob's picture

Those who can, do.  Those who can't go on TV.

TotalCarp's picture

The guy is a prick, no doubt. I love how he points to economists' research all the time.. Duuuuude.. Economists got every fking crisis wrong and by and large do not understand the business cycle/global cash flows..

CrashisOptimistic's picture

A few of us understand the uncomfortable truth.

There is no economics.  There is only physics.  Economic activity derives from oil, and oil is getting scarce.  And note this is oil, not condensate -- which doesn't have 5.6 million BTUs per barrel as proper crude does.

Crude + Condensate as a barrel total is concealing the loss of **net** joules/BTUs going into the "system" and so the system can no longer function/grow.

slightlyskeptical's picture

Only thing that is going to work is to take away the ability of the banks to extract a % of all economic activity. Let the governement benefit from it to a smaller degree to help reduce taxes. Buy all the debt from banks and investors and refinance so payments are 20% lower.

All the money the Fed is printing has to be paid back by us, the US taxpayer. Might as well benefit from the other side of that.

Inthemix96's picture

That which cannot be paid, in the long run,

Wont be paid.

That simple folks.

madcows's picture

When they can't pay it, they'll just confiscate it from your account.

Inthemix96's picture

Not mine madcows,

Mine was long gone back in '08.

Pity the poor fuckers who still have the sheeple glasses on though, makes me sick thinking the shit coming our way.

fuu's picture

The second mind is hanging from the string.

PUD's picture

Money as debt! Borrow to consume! Credit is the lifeblood of the economy!

This system is a disease...cancer

centerline's picture

Nice to see Nate's chart making rounds again.  What it really attempts to show, in my opinion, is when organic and synthetic yield gave out on average and the system turned inward on itself (cannabalism).  Organic yield died a long time ago... replaced with synthetic yield, created by banks who were turned loose to create creative financial instruments and lever up the system.  Later manifesting in bubbles and more bubbles until debt could not be crammed down any further.  On average of course.  The trailing effect is the middle class cramming down college debt, the final bubble.

smartstrike's picture

Nates charts were wrong back in 2008 and they're wrong now, but Nate is super guy who is RIGHT about everything else unlike ofZERObrains blogger who is almost never right. 

First consider the misleading title of his article---the fact is that ECB and the Fed are are not printing money to stimulate the economy, they're replacing worthless debt with new debt. The task of stimulating economies falls to political bodies that are more concerned with reining in high velocity spending such as Social Security, unemployment etc via so called austerity measures or sequestration.

Second, unless one does away with DEBT=MONEY, there is no possible way for economy to grow unless debt increases.

centerline's picture

That's why I "interpret" the charts loosely.  The data for that work came right off the St. Louis Fed.  I did my own number crunching back then and came up with similar results actually - although my scale was slightly different which shifted the crossover point.  So, there is some subjectivity here - especially considering the complexity of the subject matter.  With that understanding, my take away was more qualitative instead of thinking the date Nate's chart crosses the X-axis was "the day."

The concept of debt saturation in general is spot on and I agree that Nate was on target in most other areas as well.  Hope he is doing well.  Nice guy.  There are a few here that I think were posters from his site.

hugovanderbubble's picture

Short Cable (GBPUSD) @1.5350 target 1.4790


Short Aussie @ 1.0400 target 1.0020

foodstampbarry's picture

All you have to have is 'Hope'... Just ask Obozo.

ebworthen's picture

Spot on, spot on.

The FED is crushing the middle class, punishing savers, and rewarding the skullduggery of the financial sector.

How Bernanke and the other "economists" can keep a straight face while claiming that ZIRP and endless 0.05% back door cash and $85 Billion/month to banks to gamble in the casino helps employment and lowers inflation is beyond me.

What they are doing is swinging a wrecking ball at the foundation of sound money; it is utterly unethical and immoral.

prains's picture

MOAR,MOAR,MOAR.......until its.......WOAR,WOAR,WOAR

NeedleDickTheBugFucker's picture

Forget reaching for the carrot.  More like chasing one's tail.

hooligan2009's picture

it is as valid 

to lower interest rates whilst maintaining bank lending margins/spreads to borrowers, as is current policy costing the economy the margin spread that is paid to banks

as it is

to have a higher deposit rate for individualize lenders than a borrowing rate (borrow at 4% lend at 6% immediately to a bank) costing the economy the margin spread but the spread is paid to consumers

why should banks enjoy the advantage when the economy is going to rack and ruin because of

  1. stupidity and sloth within government.
  2. the banks enjoy the (usurious, e.g. credit card) margin spread because of the predilection for the Federal Governments to the socialization of losses,
  3. malinvestment of capital to pet projects that reward corrupt politicians in exchange for political leverage,
  4. government sponsored bank corruption (fraudie and funnie, BAC, C),
  5. racketeering by banks and brokers of government debt issues bought a heartbeat later by the Fed),
  6. tax evasion by US banks and corporates via structured swaps into tax havens,
  7. price gouging by insurance companies (for household, car, and health)
  8. the cost to people saving money by investing in the stock market (because of wilful misrepresentation and audit malfeasance of banks' loan portfolios)

the list goes on and on. there is no legislation that is grounded in a code of conduct for banks that is approved by democratic principles. only laws that aren't read by congress and legal precedence that evolves at a snails pace and which is appropriate for a bygone age.

exactly what have the banks done to deserve the margin belongs to people who are supposed to pay a fair rate. people vote in governments to build governance procedures and to act for the people, not the banks. the banks are just another company and have no god-given right to defraud people.

IamtheREALmario's picture

It should be obvious by now that fiat capital systems used for the purpose of enriching parasitic cronies and enslaving the masses will always fail. This kind of system is mathematically impossible to manage over the long-term ... PERIOD! The debt always exceeds the value adding productive capacity. Anyone who tells you different is selling something. This was all worked out many, many years ago. However, it works so well for the parasitic crony elitists who buy physical and productive assets at no cost and get slave slabor, simply by printing money  ... that they can't resist resurrecting it again and again.

ramacers's picture

rat poison has it's merits, but "we" eschewed it in 2008.