Klarman Clarity: "If The Government [Still] Can't Allow Failure Then We Are Indeed Close To Collapse"

Tyler Durden's picture

One of the most insightful comments explaining what happened last night, when Bernanke just killed all credibility that the economy may soon be able to stand up on its own two legs, comes from Seth Klarman who crushed the logic (or lack thereof) behind proclaiming any recovery in a world in which the only marginal factor preventing an all out collapse in the stock market and thus economy is, and continues, to be the Federal Reserve which has not only destroyed the market's discounting function, but with every passing day is taking over both the entire US economy (the Fed's balance sheet is now 25% of US GDP) and the US bond market (currently in possession of 30% of all 10 Year equivalents).

To wit:

If the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse

And the rest of Klarman's sermon, serving as the perfect counter to the voodoo shamans operating their Keynesian religion in the Marriner Eccles building. From Seth Klarman of Baupost:

Is it possible that the average citizen understands our country's fiscal situation better than many of our politicians or prominent economists?


Most people seem to viscerally recognize that the absence of an immediate crisis does not mean we will not eventually face one. They are wary of believing promises by those who failed to predict previous crises in housing and in highly leveraged financial institutions.


They regard with skepticism those who don't accept that we have a debt problem, or insist that inflation will remain under control. (Indeed, they know inflation is not well under control, for they know how far the purchasing power of a dollar has dropped when they go to the supermarket or service station.)


They are pretty sure they are not getting reasonable value from the taxes they pay.


When an economist tells them that growing the nation's debt over the past 12 years from $6 trillion to $16 trillion is not a problem, and that doubling it again will still not be a problem, this simply does not compute. They know the trajectory we are on.


When politicians claim that this tax increase or that spending cut will generate trillions over the next decade, they are properly skeptical over whether anyone can truly know what will happen next year, let alone a decade or more from now.


They are wary of grand bargains that kick in years down the road, knowing that the failure to make hard decisions is how we got into today's mess. They remember that one of the basic principles of economics is scarcity, which is a powerful force in their own lives.


They know that a society's wealth is not unlimited, and that if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing.


They also know that the only reason paper money, backed not by anything tangible but only a promise, has any value at all is because it is scarce. With all the printing, the credibility of our entire trust-based monetary system will be increasingly called into question.


And when you tell the populace that we can all enjoy a free lunch of extremely low interest rates, massive Fed purchases of mounting treasury issuance, trillions of dollars of expansion in the Fed's balance sheet, and huge deficits far into the future, they are highly skeptical not because they know precisely what will happen but because they are sure that no one else--even, or perhaps especially, the  policymakers—does either.

That is all.

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kliguy38's picture

Isn't it obvious

The Juggernaut's picture

But the Bernanke, his beard and the US gov't is saying everything is good!  All their numbers are looking good too!

BaBaBouy's picture

The GOLD Manipulation Is Huge Part Of This Systemic Market Control.

Cult_of_Reason's picture

It is not just the US. We are in a global clasterfuck.

eatthebanksters's picture

Yippee!  We're going to the Funny Farm!  Isn't that DC these days?

jbvtme's picture

the industrial revolution (making goods in factories with slaves more efficiently) was a failure. what's next?  local tribalism or agenda 21 fema camps...

Harlequin001's picture

Sounds not dissimilar to Frederick The Great's quote 'He who defends everything defends nothig"...

but still very true...

Answer me one question, 'If Keynesianism works so well, why didn't it become the way of things since the dawn of time? Why did we ever use, or need to use gold as money?"


flacon's picture

"Answer me one question, 'If Keynesianism works so well, why didn't it become the way of things since the dawn of time? Why did we ever use, or need to use gold as money?""


Answer: Because we evolved from apes and now there is an enlightened class of momo-sapiens who have pH Deees from accredited Ivy League Universities and Nobel Prizes. They have been successful in stamping out poverty, hunger and war. The world is a much better place because of the vision of the annointed. 


Manthong's picture

“..always with the negative wavelengths, Moriarity

Can’t you look at the bright side for a change?”..

As a very highly regarded aficionado of Tunisian youngsters once said to FDR..

 “In the long run we are all dead.”

Divided States of America's picture

Theres so many intelligent ppl on ZH that it would be nice if the current cabinet consisted of these guys instead of the clowns we have right now:

President of the United States

Ron Paul - nuff said

Vice President of the United States
Tyler Durden/Zerohedge

Department of the State
fonz - dont think he wont hide in his yacht when shit hits the fan

Department of the Treasury
ekg - someone who knows that the fuck is going on with the financial system (not like Timmay and Lack Jew)

Department of Defense
Bay of Pigs

Department of Justice

Department of Commerce

Department of Education
Department of Homeland Security
otto skorzeny 

White House Chief of Staff
Francis Sawyer - I think he will be fair enough to allow Kito to get a spot somewhere..lol

United States Ambassador to the United Nations
Kito (we need to be balanced in our representation, not like before)

As for me, I, Divided States of America, will be the next Chairman of the SEC and will ban HFT trading and midget porn as my first tasks on the job.

Manthong's picture

as a mental midget, I object to one of your propositions..

But could I get the nomination to replace one of my kinfolk on the s c o t u s ?

Black Swan 9's picture

What a nice fantasy. Founding Fathers redux.

Cynthia McKinney belongs in there somewhere.

Traps's picture

DS, with all due respect with Dr Paul as Prez there would be:

No DHS, no Dept of Ed, no Commerce or Tres


But I like your line-up none-the-less

Totentänzerlied's picture

Dept. of education? Dept. of homeland security? SEC? Dept. of defense? Dept. of commerce? UN?

Unless their first (and only) act was to dissolve these nightmarish institutions and fire every last employee (with great pleasure!), this accomplishes nothing.

PS: let be me the one who officially announces that the .gov is reneging on all pension obligations, eliminating social security, trashing obamadoesntcare, closing its 1000 foreign bases, scrapping the USC, and has just conducted a dawn raid on the homes and offices of all Fed governors and all Fed offices, and telling Israel and Europe to go FUCK themselves. I would savor this moment for eternity.

TheReplacement's picture

I object!  You would allow the DoE and DHS to continue to exist?  You would keep us in the UN?  You would just keep us on the same path to distruction but at a slower pace is all.

roadhazard's picture

"momo-sapiens"... I laffed.

Flakmeister's picture

Keynesian Economics has never existed in the form put forth by its founder. Not that it could exist in its pure form, all applications of isms are bastard offsprings of the original thought...

Kensesian theory wasn't developed until it was for the same reason that the Ancient Greeks could not grasp and use Einsteinian Relativity...

BTW, your argument is relevant as to why minanarchist and libertarian ideologies are exercises in mental masturbation, i.e. they fly in the face of natural human behaviour.... 

flacon's picture

Keynes believed, foolishly, that one could spend their way out of misery by borrowing money. He forgot that borrowed money has to be repaid, PLUS INTEREST. I guess he figured that one could just borrow the money to repay it. And that is where we are today. Borrowing to repay. Fucked-up-in-the-head system. 


That's why Keynes got his GDP equation wrong.... Government spending does not equal production unless the government had a surplus of money stolen from the citizens (which was a contributing cause of the depression which necessitated the government spending in the first place) that it could use. Instead the government borrows the money and then spends it, then borrows more money to pay it off. Fucked-up-in-the-head system. 

Flakmeister's picture

Hey go ahead and write a critique of Keynsianism, I ain;t here to defend it against your efforts. I will only comment that von Mises was even more misquided in his economic posturings...

And your explantion of the Depression is laughable at best...

PS And do you really think that Keynes did not realize borrowed money had to be paid back. Good god, you clearly have no idea what he actually wrote...

DanDaley's picture

The multiplier effect is really the stultifier effect.  They didn't care about that though, because it was never about making the economy function well, it was always about promoting their agenda.

DaveyJones's picture

Although called something else, underlying much of Keynes thought is infinite growth something you disagree with 

Flakmeister's picture

Absolutely, that was probably his greatest shortcoming. In fact, Economics as a discipline has a very hard time dealing with limitations to the Growth paradigm.. Might have something to do with rocking the boat and furthering your career.. You know, Market Forces....

DaveyJones's picture

Isn't inadequate aggregrate growth a false assumption that government can substitute for the raw elements of the economic engine? The funny thing about most of the modern economic philosophies are that, like everything, they are influenced by their current environment. These ideas have caught on and caught us with out pants down because they grew, hormonally, out of the era of cheap raw energy and the foolish idea that the planets resources would keep going, never get poisoned, and never turn hostile. Funny too, big government, just like big industry is behaving like a close cousin. Big difference though, I trust nature and natural systems a little more than the other two. Like the rise in homestead posts on this site, the answers are personal, small, but fundamental all at the same time. There is another tremednous element going on though and that's the criminal element. A part of nature that is maybe not unique to mankind but its unchecked growth is definitely a trademark of the "upright." It is tragic and disgusting to see that the very forces claiming to help protect "us" from these big problems and big players are not only protecting them but helping them grow to such an ugly state. We will not fix these problems without some sort of rules system put back into place and actually enforced. In fact, things seem so bad, that the rule system is a priority if we want to save any participation and respect for the social structure.     

Flakmeister's picture

Good post... but I have to run, will comment later...

RockyRacoon's picture

I have the runs too.  Think I got some bad broccoli.  We shall recover.

Shell Game's picture

@Davey - Agree with Flak, nice post. 

Col_Sanders's picture

Infinite growth isn't required in a system where people are left alone.

Billions of people, left alone to trade among themselves freely, would easily come up with ways to deal with just about anything including scarcity of certain resources.

Would mistakes be made?  Sure.  Would people die?  Probably.  Would species go extinct?  Most definitely.  However, this is the nature of life - the evoloutionary cycle.  It's been happening for billions of years and isn't going to stop - or slow down - simply because one particular species on the stage believes it can control or stop the process.

We can't.  No one can.

But fear drives us to try - and that leads us to believe all sorts of things we're told by those who want to control us.

These beliefs grow and spread and replicate like a cancer.  They create cell after cell after cell...each consuming everything around it yet producing nothing but other cancerous cells.

And we end up with things like a central bank, debt-based "money," fractional reserve banking, and a government that is so intent on protecting certain industries that it will use its power not only to advocate on their behalf, but make competition either too costly or downright criminal - and therefore the necessity which drives future invention is hidden or ignored.  And resources are consumed until they're gone.

This situation wasn't too bad when it was confined to limited areas of the globe and those who wanted to be left alone could find places that were out of reach.  However, today there are no places left to go.  The cancer has metastisized to every part of the body.

Which means it's just a matter of time at this point.

JR's picture

Keynesian economics continues to start and fail and start again because it is not judged by its failures. Instead, it is judged by its proponents, their titles and honors, etc., rather than its results.

We are finding "titles and honors" don't measure a man; we just judge the proponents of Keynesianism by their actions and motives.

Skateboarder's picture

Free lunch[ables] 4evs, bitchezzz!*

*offer valid while Ponzi intact. Restrictions may apply.

RockyRacoon's picture

The key is at the very beginning:

Is it possible that the average citizen understands our country's fiscal situation better than many of our politicians or prominent economists?

No, it's not possible.  Which leads to the inevitable conclusion that those in charge are doing this on purpose.  It's obvious when one follows the money.  The banks/corporations/government are looting the country and it won't stop until every person who can actually produce is bled dry.

AON's picture

Thats right Rocky!  The inevitable conclusion must be either they are stupid and don't know what they are doing or they are corrupt and know exactly what they are doing.  I'll go with you.  They are corrupt and know exactly what they are doing.

TruthInSunshine's picture

If you buy "stawks" and lose money, sue the U.S. Treasury, the Federal Reserve, and Ben Bernanke, Janet Yellen, William Dudley, Charles Evans, et al. individually.

These entities and individuals at least implicitly guaranteed that stocks will never fall. A case can be made that they do not enjoy governmental immunity, as they would under ordinary circumstances, as they've "written" de facto statutory authority as the guarantors of equity purchase profits.

p.s.  Bernanke's presser yesterday will be viewed in retrospect as the event that essentially marked the top. The short squeezey may be on today, but it's devoid of legs. Unless Bernank comes out tomorrow and announces a doubling or tripling of treasury and MBS purchases from current levels, nah nah nah nah, nah nah nah nah, nah nah nah nah, gooooodbye.

prains's picture

This one gets printed into flames, debt and death is all UKKKA knows, sorry nice knowing y'all.

TruthInSunshine's picture

By the way, Bernanke did/said literally the worst things in terms of projecting the impression - even if through bumbling ambiguity - of continuing dovishness & accomodative monetary policy (even though he really did not remotely come close to stating the Fed was prepared to increase asset purchases, but I digress) in response to questions about the "taper tantrum."

Any Great(er) Rotation from bonds to stocks would merely exert multitiudes more upward pressure on interest rates, creating a literal crisis for the Fed, which really would have to literally expand its balance sheet at a far greater pace than they're now doing, in order to absorb many more orphaned, under-yielding treasuries.

fonzannoon's picture

All he did yesterday was reinforce his bullshit viewpoint that tapering is not tightening. He will attempt to taper, and hope that his words can keep the bond market from becoming an avalanche that runs us all over.

NeedleDickTheBugFucker's picture

tapering not = tightening

cutting spending (really the growth of spending) = austerity

It's the same logic or in this case illogic.

game theory's picture

Mmm...I suspect the ambiguity is by design. The Fed certainly has very few options against its adversaries at this point. They make a feint at a taper and get the wrong result. The hurl a few insults at "feral hogs" and then try another move with hints at continued dovishness.  

Phat Stax's picture

could be... tops often show up on good news.


gjp's picture

US, as custodian of the global reserve currency, and leader in 'democracy' and 'capitalism' is without doubt the epicentre of the rot though.

otto skorzeny's picture

this fucking tribesman will be the death of us all

viahj's picture

i plan to outlive this fucker.  you do not have to participate in their scheme but you will have to avoid the bombs.

Headbanger's picture

This is exactly what Rick Santelli ranted about just last month.



worbsid's picture

Now that was a fine rant.  It is amazing how much good it did. 

HaroldWang's picture

It's insanely obvious. Bernanke told the world that 3 years of QE, bond buying, etc, aren't working very well. Why the market would try to celebrate that rather than be scared shitless is beyond me.

fonzannoon's picture

Because their other option is to blow their own brains out.

otto skorzeny's picture

it would be great if they used DHS's ammo to accomplish that.

prains's picture

I think you'll be unpleasantly surprised at how many suckas are out there still waitng to be strip mined of what "assets" they still hold. As we speak they are trying to bankrupt as many miners as they can.