Guest Post: The Smoke And Mirrors Are Running Out

Tyler Durden's picture

Originally posted at Monty Pelerin's World blog,

Those who believe the economy is recovering are ignorant of the facts. Other than the Great Depression no US recovery (and I don’t believe we are in a recovery) taken longer. Eventually it may take more than a decade like the 1930s. Or perhaps it will be like Japan which is in its third decade of “recovery.”

Politics and Economics

The truth is that our economy is spent, exhausted and filled with misallocations and distortions made much worse by government interventions. There is no recovery, nor will there be one until a massive purge (usually referred to as a depression) occurs. This event will result in bankruptcies that release scarce, misallocated physical capital from unproductive and unwanted areas to places where it is needed and can be utilized efficiently.

Rather than allow this pre-condition to an economic recovery and a growing, efficient economy, politicians want to prevent it. They use smoke, mirrors and propaganda (lies) to hide the reality of our sick economy. Their obfuscations continue, but the effective life is limited.

What politicians do to the country beyond their term in office means nothing to them. Their concern is only for themselves and the short-term that exists between elections. As a result they rob from the future to hide the true conditions of the present. Those still unborn will be paying for their criminal economic charade.

Economic Conditions


So how bad is the economy? Michael Shedlock, “Mish” is among the more prolific as well as more incisive financial analysts on the web. His site is always worth reading, but a recent post is essential. To impress upon you the seriousness of the situation and to encourage you to read his post, I quote some of his points (anything in red is my emphasis):

… we’re doing the same thing that led to the 2008 blowup — we’ve learned exactly nothing.  In real terms our GDP is in fact contracting by about $500 billion a quarter, after adjusting for debt expansion — that’s $2 trillion a year, more or less.

In terms of debt and inflation, Mish determined that:

… we’re contracting in purchasing power adjusted for new debt at more than 10% over the last four quarters.

The debt to GDP ratio reached the highest in history just before the 2008 collapse. It remains in this record territory and is just as unsustainable now as it was in 2008:

… the absolute level of debt to GDP, however, refuses to go under 350%; it has now started rising again but is entirely coming from two sectors — business credit and the Federal Government.

Consumers reduced their debt levels, although probably not enough. They are still strapped with more debt than many can properly service. Consumption, as a result, has dampened as more income goes to debt service and less debt is added. That appears to be a condition that should prevail for several more years.

Remember, the announced reason for the loose Fed policy was to drive consumption. As Mish observed:

… this so-called “expansion” driven by ZIRP and deficits has a use-by date that has expired and we are now trying to evade the fact that the fish is well into the “stinks up the joint” stage.

Obviously, it has not worked.

Read Mish’s article to view most of his observations in chart format.

Desperate Government

Although Mish does not make this point, I believe it is a relevant one. Government continues to borrow and spend in an effort to hide the truly rotten condition of the economy. This action was begun under the guise of stimulating a recovery. It is obvious that it has not worked. It was obvious to some that it could never work.

Despite its obvious failure, theft from future generations continues. There are two main reasons for this, in my opinion:

  • To hide from the people how desperate the economic situation truly is.
  • To enable government to continue its current level of spending which cannot be funded via tax revenues or real market Treasury sales (certainly not at current interest rates; perhaps at no reasonable  interest rate).

Government has exhausted its faux solutions. Nothing they do, except reduce spending, can help the economy. Reducing spending means another Great Depression and the exposure of the economic scam they have been running. Thus, spending will likely continue as will the Federal Reserve enabling, euphemistically called quantitative easing.

A Fly In The Ointment

There is a limit on how long the fraud continues. The government is in what is known as a debt death spiral. They must borrow money to repay prior debts. It is as if they are using their Visa Card to make an American Express payment. The rate of new debt additions dwarf any rate of growth the economy can possibly achieve. The end is certain, only its timing is unknown.

Once interest rates begin to rise, and they will, it is game over. Short-term Treasury interest rates are normally 3% with no inflation. In an inflationary environment, a premium for expected inflation is tacked on to that 3%.

Under today’s conditions, ST Treasuries could easily rise to 6 – 9%. The low end of the range represents a rise in rates of more than 5.5%. If the debt outstanding, most of which is short-term, is $17 Trillion, that would been a rise in interest expense of close to a Trillion dollars annually. That would be added to deficits which are expected to be around a Trillion dollars per year.  The high end of the range would produce a deficit in excess of $2.5 Trillion per year.

At the low end of the interest rate range, deficits would exceed more than 10% of GDP, putting us right up there with the sick European countries. At the high end, we would be like Greece without its glorious history and climate.

It gets worse than the above numbers convey. When interest rates rise, the economy will contract and probably severely. Then cries for more stimulus would be heard. An additional Trillion dollars or so would likely be added to the deficit, although many would want multiples of that. In either case, we become Greece on steroids.

Another Fly In The Ointment

There are those who say the US government cannot go broke because it has a printing press. They argue that the level of deficits don’t matter because the US can just print more money. Monetary fraud, which this is,  also has a limit.

Only paper and ink limit the amount of currency the government can print. However, government does not control the value of the money which is determined by the public.  Printing money depreciates the value of money (otherwise known as inflation). Market forces (economic actors) determine what this value is via supply and demand interaction.

When money is expected to buy less tomorrow than it does today, people will spend it sooner. This drives inflation even higher. Ludwig von Mises described this end phase as a crack-up boom:

Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.

The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration.

Mises spent much of his life studying money, the business cycle and inflation. He correctly identified the choice that now stands before our political class (my emboldening added):

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

In the event of the total catastrophe, savings and fixed income become worthless. The middle class of a country is wiped out in terms of wealth. Poverty abounds except at the top where those with large wealth and insider information are able to protect themselves and enhance their real wealth. Inflation does not destroy wealth; it merely redistributes it.

How Does It End?

Neither ending is attractive, but opportunities for one or the other have been squandered. Sadly, the decision as to which route is taken is in the hands of our criminal political class. Their behavior suggests that they will do whatever it takes to continue the charade. They want to maintain their scam for as long as they can..

If they are successful, a crack-up boom is coming. History shows this ending in most all countries in our condition.

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SheepDog-One's picture

I don't agree completely, it was all planned so they can monetize the debt and bring in their 1 world govt, 1 world bank, and all that bullshit, which I believe they thought wuld already have been put in place a couple years's all already failed, they just can't admit it and desperately cling still. I think this is why these 'scandals' that everyone has known about for a long time are suddenly 'news'....for 1 thing, the disarming of america failed spectacularly, so now they're letting ObaMao twist in the breeze a bit. Remember who controls the media, the CIA. Anyway, good luck Maniacal Monetizers, you'll need it when the wheels falls off we're all coming for YOU, and you know this.

MillionDollarBogus_'s picture

I don't see how new treasury debt interest rates can rise, unless there is an actual economic stimulation/recovery of some sort.

Am thinking that Bernanke is pondering his next job, or early retirement, as his grand plan seems to have fizzled.

Maybe a massive new WPA type program to put the unemployed to work..??



francis_sawyer's picture

It sucks when the smoke & mirrors run out... It means no more bong hits & no more blow...

RockyRacoon's picture

The article is the same old shit wearing a different mustache.  Mish and Mises... yada, yada.

Ain't no disguising how bad the financial situation really is, and the J6P community is getting a case of the itchy-butt.   The Inchoate Rage is developing nicely.

It's going mainstream:

Fixing money-market funds before the next crisis
zuuma's picture

WPA??  fuggeddaboudit.

What would they do?  Build a dam? hahaha!  econazis will block it.  Change 2-lane highways to 4 -- as in the 30's 40's & 50's?  hahahah, again.  econazis + NIMBYs will kill it.

Build roads in national parks? hahahah  econazis, again.  Repair buildings, bridges, pipelines, etc,?  econazis + unions will block it.

How did we ever build anything we have now??

TheReplacement's picture

How's about building a barrier, wall/fence/moat/mine field, between the US and Mexico.  Could kill two birds with one stone.  Put people to work and keep cheap labor illegals and drug couriers out.

Or WPA - War Powers Act...

PS - NSA you can blow me.

Ying-Yang's picture

At the moment... the 10 year is at 2.219 a 2.68% increase.

You don't get out much do you?

MillionDollarBogus_'s picture

I get out on my doctor's order...

Jonas Parker's picture

Your psychiatrist must keep you pretty tied up, huh?

Steve in Greensboro's picture

Why would Bernanke retire?  I thought you (or your alter ego) thought everything was going along swimmingly.

I thought you were being serious, until I read your next sentence.  Why would any of the unemployed take a WPA-style  job when things are going so well on unemployment, disability, etc.?  On the dole, there is more time for drugs and single mothers.

Now I am just confused.

MillionDollarBogus_'s picture

I was serious about the Bernanke comment.

He should leave & disappear before it gets worse.

The WPA comment was half serious, or half-bogus, which ever way to want to read it.

If the fed cut their 85 billion per month debt purchase and used the difference to put $$ in the unemployed's pockets, with some sort of make-work scheme, it may be a better use of our tax dollars.


Chuck Walla's picture

MDB- Obama doesn't want people to have money, not the hoi poloi.  You can't have fundamental change with a thriving middle class. So, destruction of the middle continues until we get to the end point.  When we become desperate, the people will cry out, "Save us, Barack"! And the dictatorship will commence. Germany 1936 is the template.  And if that doesn't work Moscow 1917.

Imminent Crucible's picture

How can Treasury interest rates rise?

Easy; it goes like this:

They have a Treasury auction (probably going to twice a day soon, and maybe adding Saturday auctions). Indirect bidders look at the secondary market rates and say, "Hey--the TYX (long bond) yield just soared through 3.30 and past 3.38. Why should I overpay for today's run if I can get 3.38 in the open market?"

As a result, the primary dealers must buy it all, and then repo it to the Fed five days later so they have the cash to buy at the next auction. End result: On-the-run yields must quickly chase off-the-run yields higher, or the Fed soon buys (and owns) it all.

At the current rate, the Fed will own ALL existing Treasury debt by 2018. At the latest.

LawsofPhysics's picture

"At the current rate, the Fed will own ALL existing Treasury debt by 2018. At the latest." - correct, and nobody will accept the dollar in exchange for anything...  prepare accordingly.

PlausibleDenial's picture

Is this (2018) before or after you have to pay for tax deferral when the Feds tap the qualified accounts (401k's etc) and make investors buys certain allocation of treasuries?

tickhound's picture

I don't agree either.  BUT, it was all planned only because it was inevitable... It's a smooth and orderly self-destruction. 

Nations won't lay down for a loss in so-called financial sovereignty without EVERYTHING GO BOOM!  Salvation will come for the starving masses from these same institutions... World Bank, UN, etc. 

Complete PONZI Unification has to ride a wave of some financial destruction.  And this "new" institution will have "leaders."  That herd needs to be thinned out.  "You either agree, or I force you to agree."

Whether it is them "losing control" or that they are "right on schedule", having public turmoil presents the perfect back-drop.  Particularly if their anger can be managed towards one another, or the goal itself.

From Government Bunkers, to Scandals, Skynet,  Financial Turmoil, to Public Trust, and even Solar Cycles... The timing is impeccable.

Day traders are trading a movie script. 




Yardfarmer's picture

Agreed, Sheep dog. I have five sheep dogs here on the ranch and each one of them is infinitely wiser than any politician, bureaucrat, or for that matter, most American citzens. btw, there will be no "recovery". ever. this is end game as you have eloquently expressed. checkmate

the cascading "revelations" concerning the multilayered levels of corruption which the media are now dredging up and hauling out is for the passive consumption and morose delectation of the dumbed down masses of Americans much like the insipid Goebbelsian propaganda which at one time caused them to so fulsomely laud the obvious pretense, mendacity, and outright chicanery of the Obama regime.

The American propensity for self deception and delusion is only equalled by the alacrity and viciousness with which, when given the appropriate signal, these conditioned masses turn on and attack their erstwhile idols.

q99x2's picture

Mish believes unions and pensions for poor people are the reason capitalism failed in the US. NWO couldn't find a better allie.

Steve in Greensboro's picture

Mish is opposed to government unions, as was your hero FDR.

bank guy in Brussels's picture

Again the claims about « interest rates begin to rise, and they will »

Ha !

« You cannot predict higher interest rates if you also predict QE to infinity. QE is the non-economic purchase of government and other debt securities. Therefore as long as QE expands to meet the size of bond offering, the bond market will stay bullish and interest rates will not rise significantly. »

- Jim Sinclair, JS Mineset

SheepDog-One's picture

Well, that is until no one wants a dollar anymore. Seriously Jim Sinclair declares QEzing ok as long as it keeps up with requirements for new debt? This will end 1 way, implosion.

yogibear's picture

Another reason Bernanke will leave. His PhD thesis was more academic BS. More smoke and mirrors.

It will blow up with the next Fed head if he can hold it together long enough.

As long as the US credit card is good they will keep charging.

Yardfarmer's picture

Jim ($50,000 Gold) Sinclair should run for office. He is eminently electable in the fact that the more erroneous and misleading his statements become, the more people believe him. He has been schooled in mass deception and the madness of crowds at the feet of an accomplished ascended master in that endeavor, his "guru", Satya Sai Baba.

PTR's picture

It's all a trust game.  No trust, no game.  Over.    In very simple terms, anyway.

SofaPapa's picture

I agree.  What's interesting is that those outside the inner circle lost trust in our system five years ago.  But it won't go down completely until those within the inner circle (who own most of the "wealth") turn on each other.  I don't think that's far off now.

madbraz's picture

Not Mish, Denninger.


Agree on all counts on the unsustainability of debt, but not on the rise in interest rates.   If anything, the Fed manipulates interest rates higher by pushing gamblers into risk.  That's a fact and you only have to look into this and prior QEs to see that it is rather evident - as soon as the Fed is out, interest rates begin to contract.


A world with zero growth equals a world with near zero interest rates, if you are a country with a reserve currency.

expres12's picture

Exactly... He's attributing Denninger's work to Mish.

apberusdisvet's picture

The problem with psychopaths is that they go to extremes.  In the case of the current Administration and all of its scandals, a major distraction is needed.  WWIII is effectively checkmated by Russia and China, so it will have to be domestic.  Major false flag leading to martial law and a major clampdown?  Who knows, but it is now a distinct probability.

atomicwasted's picture

I stopped reading when I saw "Mish."

expres12's picture

Well you can go back and read it because it's Denninger's work, not Mish's.

Lmo Mutton's picture

We still have a Tuesday this week.

All will be fine.  My xbox just told me so.

lasvegaspersona's picture

Our politicians are so worried about 'fixing' things that they can't see that this situation can't be fixed. They should be doing disaster preparation and they are not. I guess it is just the politician mindset. When this all blows up they will then spend most of their time trying to figure out who to blame. Saw it in Katrina and will see it again in the Great SHiTF of 2013.



Crash and burn BIG DEPRESSION.

Okay, so what ?

Plenty of banker bacon, socialite steak, coggressman cutlets, and POTB potstickers to keep the soup kitchens going for a while.

All green in color, from the Soylent Food Corporation, the new power broker on the block.

Meet the new boss, same as the old boss.

Hannibal's picture

Big brother has failed, the nwo has failed, dismarming law abiding citizen has failed, the criminal frauds of banking and govt have failed, sweating bullets knowning their days are numbered. Long live our Constitional Republic.!

kareninca's picture

I find this very hard to read, given that he cites Mish and it's a Denninger post.  WTF??  They are two totally different bloggers.  As soon as I saw the quote, I know it was wrong; I'd already read the Denninger post.  Which was really good, unlike this cheap rip-off.  Really, really lame.

robnume's picture

Yes, this is a Karl Denninger post. I know because I read him everyday. I hate to use this old joke, but you must admit that it fits precisely: "How do you know a politician is lying? His lips are moving".

lasvegaspersona's picture

I believe that we will not see the typical Crack Up Boom that most hyperinflations see. Instead of wheelbarrows we will see a very sudden end to the dollar. One day the gold market will just snap as no further gold will be offered. This will send a shock wave through the derivatives market and we will suddenly observe the result of our excess money making in a fraction of a second rather than the ususal pattern of gradually increasing prices.

Bernacke has successfully controlled the velocity of money and has sequestered it so that commodities have not been impacted this time. The stock market is absorbing most of the shock and banks have continued to hold onto reserves. As bullion banks (or hedge funds) continue their short selling sprees in the gold market the prices have been driven down but the physical must continue to flow even at these lower prices. It will be the failure of the physical gold market where this sucker finally pops.

Faust100F's picture

The party is about over we have allowed the wall street gang to loot the pantry, and destroy the savings and earnings of our middle class.  We are headed for a more astere lifestyle, the best years are behind us, and we now have to face the music.

There is no inflation, what a joke, kinda nice when our government elects what is used in that calculation, like excluding energy and foods costs.

Class 1 farmland in Iowa is still selling around $15,000 an acre, corn is at $7 and soybeans are at $15 today at the local elevators.  

If you believe that all the farmland is being purchased with Cash and no debt involved then you have fallen for the Madison Avenue BS pervading the land markets out here.

When interest rates start to rise, this whole charade will blow sky high.  Welcome to fantasyland.  Farmers understand, that they are better holding corn and soybeans on the farm then exchanging the physical commodity for fiat currency.

The party is about over how do I know . . . well too many people actually believe the worst is over, when in fact, it is just beginning.   Adios Amigos. John  

gdpetti's picture

It's all about cycles, but looking 'outside the box' of politics or economics, we see nature itself has cycles that destroy civilizations, which is why our history doesn't seem to go back very far and most knowledge gets lost in such cataclysmic eras. A good example is the simple fact that we still can't understand how those pyramids were built, let alone understand the EM properties for their use. It seems science has replaced religion over the years as we moved from the simple right brain functions to the more 'rational' left brain functions in our nation-states, but in recent decades the cycle has returned to the irrational right brain mob mentality and it helps keep control of the sheeple who have been so dumbed down through the years, that they neither know nor care about reality anymore and thus we approach the close of this cycle in the usual manner of complete chaos.

The warning signs are easy to see in the economy, though few care to see it, and for those paying attention, these signs have been showing up for years in our world around us as well, though the same govt types have tried to sell us a con game called 'global warming' when in fact it's the opposite, though as long as we keep the blinders on and don't look back very far, the 80s and 90s did seem to warm up compared to the earlier decades in which even Newsweek warned of the coming ice age, another long term cycle that is among many set to converge soon, with the main event (comet cluster et al) next year, perhaps in the Spring. NASA has sent up many probes to search for 'dark matter' and found many 'cool dark stars' etc but never seem to find anything we need to worry about. Like the govts economic, political and military specialists, we are told 'it is different this time', not to worry, and trust no one but them. The same lies are designed to maintain control of the herd of sheep as they prepare their NWO/Global Police State that will be needed when the real threat arrives next year, and who knows how much cosmic crap will arrive before then, as anyone who's seen the increase in cometary activity grown 5x in the last 12 years has some idea of, as well as the increase in EQ activity, volcanic activity as the whole planet's EM field is affected. They've ridiculed the Mayan 2012 issue but that date was never specific and still isn't, but like the 'warming' issue that is now called 'climate change', it is a matter of interpretation and the govt's job is to obfuscate them so that everyone stays in their box and doesn't compare notes with others, for when they do, they see all kinds of patterns come into focus and they all spell major, major problems... ie destruction, and in such an environment, who cares about debt? It's all about 'divide and conquer' baby and maintaining control in the aftermath, no wonder Homeland Defense thinks it needs so many hollow point bullets.