Guest Post: The ‘No Exit’ Meme Goes Mainstream

Tyler Durden's picture

Submitted by Pater Tenebrarum of Acting-Man blog,

A Change in Tune

It is interesting to watch how mainstream reporting on certain major topics at times undergoes chameleon-like changes with the meme originally presented suddenly turning into the exact opposite. Not too long ago conviction was extremely high that the Fed would slow down its 'QE' operations and that the economy's weak recovery was going to morph into something one might call 'business as usual'. That notion has never struck us as credible.

Readers who follow Zerohedge may have noticed two recent articles discussing the change in mainstream bank analyst views on the dreaded 'QE taper'. It is instructive to review them: Deutsche Bank now argues that there 'won't be any tapering at all', while SocGen as gone a step further and is now saying 'QE may be increased'.

In other words, mainstream analysts have finally realized that the  insane are running the asylum. Regarding the changing tune in the popular mainstream press, we have come across this recent article at Bloomberg, entitled “Central Banks Drop Tightening Talk as Easy Money Goes On”.


“The era of easy money is shaping up to keep going into 2014. The Bank of Canada’s dropping of language about the need for future interest-rate increases and today’s decisions by central banks in Norway and Sweden to leave their rates on hold unite them with counterparts in reinforcing rather than retracting loose monetary policy. The Federal Reserve delayed a pullback in asset purchases, while emerging markets from Hungary to Chile cut borrowing costs in the past two months.


“We are at the cusp of another round of global monetary easing,” said Joachim Fels, co-chief global economist at Morgan Stanley in London.


Policy makers are reacting to another cooling of global growth, led this time by weakening in developing nations while inflation and job growth remain stagnant in much of the industrial world. The risk is that continued stimulus will inflate asset bubbles central bankers will have to deal with later. Already, talk of unsustainable home-price increases is spreading from Germany to New Zealand, while the MSCI World Index of developed-world stock markets is near its highest level since 2007.


“We are undoubtedly seeing these central bankers go wild,” said Richard Gilhooly, an interest-rate strategist at TD Securities Inc. in New York. They “are just pumping liquidity hand over fist and promising to keep rates down. It’s not normal.”


(emphasis added)

So, have central bankers drunk the Kool-Aid with the acid in it? What we see here is global acceptance of the Bernankean theory – largely derived from Milton Friedman's analysis of the depression era and Bernanke's own analysis of Japan's post bubble era – that even though new bubbles may be staring everyone into the face, central banks must 'not make the mistake to stop easing too early'. It is held that that would 'endanger the recovery', similar to  what happened in the US in 1937 and Japan in 1996.

We have previously discussed that the 'Ghost of 1937' is hanging over the proceedings and tried to explain why this reasoning is absurd. While it is true that the liquidation of malinvested capital would resume if the monetary heroin doses were to be reduced, the only alternative is to try to engender an 'eternal boom' by printing ever more money. This can only lead to an even worse ultimate outcome, in the very worst case a crack-up boom that destroys the entire monetary system.


Why It Is Not 'Business as Usual'

One of the reasons why we remain convinced that the widely hoped for return to a 'normal expansion' isn't likely to occur is that we have some evidence – tentative though it may be – that the economy's production structure has been severely distorted again by the Fed's interest rate manipulations and the huge growth in the money supply it had to engender in order to keep interest rates below the natural level dictated by time preferences.

As one of our readers frequently points out in the comments section, the policy is mainly a stealth bank bailout, as money is transferred from savers to banks in order to avert the liquidation of unsound credit. How much unsound credit is still clogging up the system after the 2008 crisis? We unfortunately don't know, as bank balance sheets have become even darker black boxes than they already were after 'mark to market' accounting was suspended in April of 2009 (no doubt people who have the time to study the hundreds of pages of bank earnings reports with their endless footnotes in detail could come up with estimates, but apparently no-one really takes the time to do that).

Below is a chart that we use to gauge how factors of production are distributed in the economy. Note that this cannot be more than a rough guide, but it is a guide that has served us well in identifying unsustainable credit-induced bubbles in the past.

What the chart shows is the ratio of capital goods (business equipment) to consumer goods production. When the ratio rises, it means that factors of production are increasingly moving from lower order stages of the capital structure to higher order ones – which is a phenomenon typically associated with credit-induced booms.

Of course this chart cannot tell us how much of the capital drawn toward higher order stages will turn out to be malinvested. However, what it does tell us is that the economy's production structure is in danger of tying up more consumer goods than it produces. In other words, it is an economy that may temporarily already be operating outside of what Roger Garrison calls the 'production possibilities frontier'.

By definition, this state of affairs is unsustainable. Eventually the process will  reverse, namely once market interest rates stop 'obeying' the central bank's diktat and relative prices in the economy begin to revert to something a bit closer to their previous configuration. The revolutionized price structure can of course never return precisely to its initial, pre-boom state. However, if market interest rates were to start increasing, the prices of capital goods would certainly begin to decline relative to the prices of consumer goods. The prices of titles to capital, i.e. stocks, would then begin to fall as well, as would the ratio shown below.



Production - capital vs. cons goods

The production of capital versus consumer goods in the US economy – once again reflecting credit bubble distortions – click to enlarge.



For readers not familiar with the long term chart, we show it below. What is interesting about this chart is that prior to the Nixon gold default and the adoption of a pure fiat money, the ratio traveled in a fairly narrow sideways channel. It only began to embark on a strong secular rise once the greatest credit bubble in history took off:



Production - capital vs. cons goods-LT

The production of capital versus consumer goods, long term. Prior to the massive credit bubble that started after the last tie of the dollar to gold was abandoned, the ratio traveled in a tight sideways channel between 0.3 and 0.4 – click to enlarge.



To be sure, not all of this structural change in the economy's capital structure can be blamed on the credit bubble. Partly it is probably also a result of the vast increase in global trade, which enabled a different and more efficient distribution of production to be put into place (labor-intensive consumer goods such as apparel are for instance nowadays mainly produced in China and other Asian nations). To the extent that the shift is due to the law of association it is beneficial and nothing to worry about.

Nevertheless, it can be clearly seen on the chart that even if we allow for a structural shift that is to some degree the result of benign developments, periods in which the credit bubble expands more strongly are accompanied by strong increases in the ratio, while busts result in 'mean reversion' moves.

The reason why these mean reversion moves don't play out more forcefully is that the central bank always does its utmost to arrest and reverse the liquidation of malinvested capital and unsound credit.



Once the economy's capital structure is distorted beyond a certain threshold, it won't matter anymore how much more monetary pumping the central bank engages in – instead of creating a temporary illusion of prosperity, the negative effects of the policy will begin to predominate almost immediately.

Given that we have evidence that the distortion is already at quite a 'ripe' stage, it should be expected that the economy will perform far worse in the near to medium term than was hitherto widely believed. This also means that monetary pumping will likely continue at full blast, as central bankers continue to erroneously assume that the policy is 'helping' the economy to recover.

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Born into this's picture

Agree. Time to shun mainstream economists from polite society.

Born into this's picture

They're like paedo priests

(And sorry for replying to my own post)

SunRise's picture

It's O.K. Everyone talks to themselves from time to time.

blindman's picture

could be that schizophrenia precludes true
narcissism, i say it is all good here and
schizophrenics don't experience loneliness
like the others. (they are never truly alone)?

markmotive's picture

The Fed and politicians are backed into a corner. There is no way out and they really don't know what to do.

Chris Martenson and John Rubino fully explore this concept.


PeaceMonger's picture

Pretty sure they've been planning this for a looong time...  The return of Marx!

Seer's picture

Yeah, right... the FACT that our paradigm has been based on the improbable notion of perpetual growth on a finite planet has nothing to do with this "downfall?," no siree, it's all been about the "Communist Plot."

I'd fucking hoped that when the USSR went down that we'd finally gotten rid of that "Commies are coming" monkey from our lexicon.  Apparently not... (still sells to the peanut gallery)

NidStyles's picture

Wait, haven't you ever read how the socialist paradise was going to end scarcity and provide for every thing everyone could ever want or need?

Boris Alatovkrap's picture

Socialist parasite is not end scarcity, but is embrace scarcity because first create dependent class of citizenry and then turn loose on true producers to galvanize power.

blindman's picture

ponzi has no ceiling, only a basement.
a basement with bars and guards and shit
when the open air thing fails.
Dave Edmunds - You'll Never Get Me Up (In One Of Those)

blindman's picture

wow dog, ease up. right .....
what is that, music?

Truthseeker2's picture

Seems like this explanation underscores the ....


blindman's picture

"Colored Aristocracy" Annie & Mac Old Time Music Moment

kaiserhoff's picture

Right direction, wrong conclusions.

It is not MAINLY a stealth bank bail out.  It is ENTIRELY a stealth bank bail out.

As to how it ends, long rates will not spontaneously rise in response to some magical recognition of Ben's high treason.  Pension money and institutional money continues to flow into stocks, because it has no other place to go.  It really is that simple.

This ends when something big collapses, something the Fed can't paper over.  There are many candidates, so it is quite impossible to predict.  Hedge accordingly.

Born into this's picture

There ain't nothing lower in the capital structure. So, as you say, if will be an existential crisis.

Al Gorerhythm's picture

Beautiful. There ain't nothing lower in the capital structure than printed currency. A gem a day keeps the insanity at bay. Cheers.

Seer's picture


And, it's not really stealth at all... (I think that most people get it that the bankers' are being stuffed)

It's the System that's collapsing.  They're trying to sell harder (by way of stuffing the banks).  People ain't buying because they're broke- the rate of growth of the past several decades has borrowed too heavily from the future and the future just doesn't have the growth to keep up the pace.

"This ends when something big collapses,"  Or, when something big gets consolidated with something else big(ger), which pretty much signals that competition is over (and we're full-on in maintenance mode trying to just keep the shit running).  Margin compression from economies of scale in reverse... But yeah, there's gonna be a large popping sound eventually...

FiatFapper's picture

Forgive my naivety, but hasn't Japan been creating funny money for many moons, so why the angst with USSA doing the same? Is it to google-bomb the doom 'n gloom meme for ad revenue?

Surely the only thing that will change is when the financial lexicon metastasizes into quadrillion and a loaf of bread will cost $5; the Earth will still spin and the oceans will still ebb and flow...

2bit Hoarder's picture

the greenback being the world reserve currency not only puts it at a distinct advantage in the world, but that also makes the potential downside that much greater.  Since the "value" of the currency is purely faith based, if that faith were to be shaken on a large scale, it would be disasterous.  two thirds of the US dollars in existence reside outside our borders.  We are currently able to print and print and export the inflation that might otherwise afflict us, but what if major creditor nations decided they no longer trusted the US dollar?  The dollar bill is our number one export ... what if other countries no longer trusted it and didn't want it?  what if our money supply tripled in this country over the course of a month?

kaiserhoff's picture

When trillions in debt go belly up,

  that is massively deflationary.

css1971's picture

Only in the very short term. Once the debt is gone, there are then trillions of dollars in credit unencumbered with debt.

Defaults are inflationary.

caShOnlY's picture

Forgive my naivety, but hasn't Japan been creating funny money for many moons, so why the angst with USSA doing the same? Is it to google-bomb the doom 'n gloom meme for ad revenue?

I think what is missed in statements like this is Japan was a major exporter during many of it's "bad" years.  It's bad years saw massive savings by its people, unfortunately in JGBs.   The U.S. is a major importer of goods and its citizens have little or no savings and massive debt.  Most of Japan's debt is held internally while half of the U.S. debt is external. 

FiatFapper's picture

Thanks for the explanation, that helps a lot to understand these dastarly market machinations.

Perhaps USSA needs to churn out more Hollywood trash to help with exports as the trite spouted about "U.S. Might Have More Oil Resources Than Saudi Arabia" sound like utter bullshit; perhaps a meme by a hedge-fund to pump up specualtive stocks.

Can history repeat itself where the Belgium's occupied the Wiemer Replublic for reparations, is it conveiable to believe that the Chinese could march on american land to demand what's theirs?

NoDebt's picture

That was a good question.  And you got 2 good answers from 2bit and cashonly.  Add them together and you have the core of how the world (currently) operates.

Japan works because they were major exporters for decades (not recently, though).

The US works because it has the world's reserve currency (the so-called petro-dollar, which we may lose as our influence wanes on the world stage).

If you think about it, other nations MUST be exporters to the nation with the world's reserve currency.  How else would that currency be held so widely by other nations except by exporting their goods to us and getting our currency in return?

Once you have that, you only need to add military supremacy to the mix.

After winning WWII, the US briefly exported like crazy to the rest of the world (rebuild), and the new regime had begun.  Nnobody dared challenge the US military other than the USSR, which eventually lost to us by economics, not by military might.  Which brings you up to where the current global regime was firmy established roughly 20 years ago after the fall of the Soviet Union.

Now that regime is under severe strain.  Where it goes from here nobody (who is honest) knows in detail, but it's not looking good for the US.  Japan isn't an export nation any more and their debt is silly-stupid.  The Greenback's status as a reserve currency is challenged on all fronts, including, notbably, China- none big enough to do it alone, but perhaps in aggregate, aided by our own spiral into debt hell.

Yen Cross's picture

NoDebt you're a shill! I always wondered why you couldn't understand a chart. You always talk genererized shit!

  You major in minor shit. You have ZERO understanding of finance. I called you out tonight! BITCHZ!

LetThemEatRand's picture

The U.S. has tons of untapped oil.  The problem is that it costs way more to pull it out than the average consumer can afford to pay at the pump.   If we found that the moon was completely hollow and filled with oil it wouldn't make a damn bit of difference.

Yen Cross's picture

  I mostly agree with you LTER. This time I agree with you 110%!  You're spot on!

olto's picture

there is a point where the cost of production against the reserves will give capitalists reason not to lend any more on oil

and we are not far from there now

maybe the shareholders will put up the dough

fat chance except for the pension funds under gov't mandate


and------here comes solar!

HardlyZero's picture

Yes the easy Oil has already been found...and easy Gold, and easy resources.  The rest is at the bottom of the ocean.

Peak resources.

But we may see demand decreases for a while and that keeps a lid on the prices...but there is definitely a floor on all tangible prices.

Its just a matter of time before something tips over a major fiat currency and then everyone will wake up and notice the situation before them.

NidStyles's picture

How much of that cost has to do with inflation or government fees? I bet most of it...

kevinduhand's picture

Maybe coz the target audience of these sites are white americans?

If there was a Nippon version of zerohedge, it'll cover more about Kuroda, Abe and Bank of Japan......or is there one?

Seer's picture

Numbers mean little.  It's the physical reality that matters.  It's "affordability" that will slam folks.

Japan's game is internal.  Just watch as their pensions collapse.  The US, however, has shifted in this direction by having the Fed be the primary purchaser of US debt: I agree that this is a good strategy for trying to hold on to some sense of control (vs. having outside entities calling it all in).  Remember: if you owe your banker $1,000 it is YOU that is in trouble; if you owe your banker $1,000,000 it is the BANKER that is in trouble (UST holders will eventually get burned, which is why I've said [for a good two years now] that the Fed will be the black hole that swallows up all the debt and then implodes).

The exponential function necessitates that it all stop.  It's an immutable fact that the game ends.  And, as they say, it happens slowly, then all of a sudden...

Stoploss's picture

The more they monetize, the worse it gets..

Seer's picture

Like it could get better?

There is ZERO chance that the perpetual growth paradigm could go on forever.

The flight path was always one ending in a crash: this is readily enough apparent when the USD completely decoupled from gold.  That we can sit here and debate all of this says a lot about the time that was bought: anyone who understands this and hasn't taken advantage of it is a fool.

The "worse" will hit all those holding USTs.  Those that are broke (most people) can't lose what they don't have.  On the other hand, those that have (think they do) DO have something to lose.  UST holders THINK they have an asset- wipe out that asset and all of a sudden one doesn't look so well off...

y3maxx's picture

Potus: "All this QE mumbo jumbo failure is all Bush's fault. You see, when I became America's first, half white President, my Job #1 was to beat out the previous # of Golf Rounds record set by any prior one, with that information written down, on the record, because my Administration doesn't hide anything, we are the most transparent in the history of our Country You see, and all this info was submitted, thru the NSA or the Cia, I forget which to be exact, to Oslo, as my Nobel Peace Prize submission."

Yen Cross's picture

     Tyler has been steadfast about the disconnect between credit and F/X risk deviation from equity markets, for months. You were warned<>

NoDebt's picture

We've been warned for a lot longer than that, Yen.  Yet it still continues.  Even if there was another 30% market pull-back and another recession, who really cares?  They will print it back up in the nominal, even if the real continues to decline.

The honest truth is, empires don't die quickly or in a big crescendo any more.  They just kind of ebb away in self-indulgence, corruption and inefficiency.  All easy efforts (like printing money out of thin air) are directed toward stopping the crumble but it can't be stopped, only managed, since the rot is constantly reinforced by the endless short term patches.  

Not many major nations are being overrun by their enemies in the literal sense any more.  It's done economically now.  And that's what's happening to us.


Yen Cross's picture

 You're correct NoDebt. There will be a substantial pullback in the next 90 days before the Fed. reloads.

  Here's an Idea.

Offthebeach's picture

Its all about the flow, the liquid,  the spooge.

Gota keep that paper swapping.  Like a shark, always moving to keep the flow past the gill plates.

There's never a grand default because the racket depends on the forever rollover.  

Savings, payoffs..."owning, free and clear" are boob bait for the sheeple. Keeps the little peeps running  on the Grand Hamster Wheel

Yen Cross's picture

 And I thought I was Cynical?

  @ Offthebeach   or off the DOCKS?

   I have a list of venture capitalists that would love to meet you.

Poor Grogman's picture

This is correct, the USD and other fiats will hold their value due to the masses demand for $€£¥ they need to meet their weekly debt obligations, the PTB have chained the masses to the debt hamster wheel, thus underpinning the value of the fiat that they can print at will.

They can modulate the supply of QE as they see fit in order to create any level of money supply-GDP- economic activity, they choose.

Until the sheeple refuse fiat, (which they won't or they will lose their McMansion ) the game will continue, and the sheeple will continue to pay the cost of their own slavery.

This will continue even as the systems and empires crumble due to rising real input costs, and the sapping of entrepreneurial flair.

Sudden resets happen throughout history after total war, but economic resets seem to be slower and more grinding.

Offthebeach's picture

For a while I couldn't read enough on the three main Spanish treasure fleets that sank off Florida. One off Key West, one on the upper Keys and one from West Palm to Port St Lucie. Once a year all the Spanish Empire gold, from the Philippines, Chile, Columbia would be assembled in Havana and in a grand fleet sent to Spain. In Spain, the gold was long spent. It was scheduald for debt payments, and late in the regime, just to service interest only. When the hurricains sunk the flow, the Royal " economy " crashed, ( As an aside, lots were owed to Spanish Jews, and when the Royals couldn't pay, and wouldn't tax anymore, the Jews were given the bums rush off to N. Africa.

Obamacare is a new tax flow stream. Like a new Soanish gold field.  FedGov knows good and well that Treasury note holders like Mafi loan sharks have asked them how they are going to service the vig? Obamacare is the new income stream, opertunity to bust out, strip, drain a new( ish ) sector of the economy. Yeah, you kids pay now and later on, years on, decades, their will be care for you. Honest. Trust us. So, like a degenerate kid gambler, pressured by loan sharks, he tells them he just got the old mab to give him a dealership to run. Run into the ground.

brettd's picture

Yep:  Remember Adolph, Benito, Francisco, & Mr. Peron didn't crumble overnight.  

And while they hung on, the masses suffered.....

yogibear's picture

Crushing the economy serves a useful purpose. A good intro for s dictator and an obvious change in the people aligned with the doctator.

Argentina and Germany are good examples.

Seer's picture

"Not many major nations are being overrun by their enemies in the literal sense any more.  It's done economically now.  And that's what's happening to us."

I don't so much believe that it's happening to us from outside forces so much as from internal ones.  I think that most of us here know that currencies always end up blowing out.  What most get WRONG, however, is the WHY: currencies represent growth, and when the physical realities can no longer support growth (say one's military forces are not powerful to grab growth from another country) then the currencies themselves are "grown" (through debasement) to make it look like growth is occurring (for the US, this phase was entered back in 1971).

The empire might not die quickly, but those within it are likely to die sooner (than if the empire was not dying).  Power hangs on to the bitter end: actual speed is more determined by the citizens within the empire, whether they slowly shift away from it or they decide to chop its head off.

DanDaley's picture

"...currencies represent growth, and when the physical realities can no longer support growth..."


I'd say not only that, but that they begin to live beyond their means, as the US was doing in 1971 with Vietnam and the newly instituted social programs.  Of course, what you say makes sense, ultimately, but people's wants get confused with needs, and the former become the latter, thus making endless growth an unattainable rainbow.

alentia's picture

QE is now normal, it will end itself with Zimbabwe type stock market highs. Everyone will be happy. Next step will be re-introduction of $500 and $1000 bills and so we will go on until working as school teacher, government employee, production line, assembly line, engineer will be not enough to pay rent or mortage and food. Speculation and gangsterism [Wall Street raw model] will be the only mean to make money. Economy will stall and only than US will default.

Running On Bingo Fuel's picture

"Economy will stall and only than US will default"

By that time the FED will be the largest creditor. So the FED will demand assets in exchange for IOU's.

That's when the fun will really start for you stupid Americans.


Dewey Cheatum Howe's picture

That is when the military will be marching members of the FED out by gunpoint. The government will not pay back the debt owed to the FED when this goes south. They will dissolve them and make some examples out of a few bankers to put the other creditors on notice.