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The Fed's Solution To Income Stagnation: Make Everyone A Speculator

Tyler Durden's picture


Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The elimination of low-risk interest income in favor of risky speculative credit/asset bubbles has led to a monumental misallocation of capital and the institutionalization of perverse and highly corrosive incentives.

The stagnation afflicting advanced economies has several fundamental causes.

1. The dynamic between rising productivity, higher labor costs and technology replacing human labor has shifted decisively in favor of labor-saving technology: the low-risk, high-yield way to increase productivity and profitability is to replace high-cost human labor with software, automation and robots.

This is true whether the labor being replaced costs $10 a day or $100 a day: the machine can produce the output faster, better and cheaper.

This leads to a conclusion that undermines all existing capitalist/socialist models:wages are no longer a practical means of distributing the surplus generated by the economy.

2. Another is the tectonic shift of energy costs: as the cheap, easily accessible oil is depleted, it costs more to extract and refine substitute fuels from unconventional sources. That pushes the cost of energy to consumers higher for structural reasons. The more a household has to spend on energy, the less disposable income is available to spend on other goods and services.

3. The decades-long postwar rise in prosperity naturally led to more demands for government services and income security. These demands are essentially open-ended--there can never be enough money spent on health, education, old age income security, public security, etc.

Since taxes are levied on income, the stagnation of wages means there are limits on how much more income can be diverted to taxes without negatively impacting household disposable income.

The Powers That Be conjured up a solution to these limitations: debt. The central state filled the gap between tax revenues and spending with borrowed money. Companies and households were encouraged to borrow money (i.e. borrow from future income) to spend in the present.

This credit/debt boom was fueled by financialization, a term for the broadening commoditization of debt and debt instruments. Financialization took off in the early 1980s, with the relaxing of restrictions on credit and credit instruments. It was no accident that the stock and real estate markets quickly reached escape velocity as debt filled the coffers of government, corporations and households with cash.

The essence of financialization is turning debt into a tradeable security that can be leveraged into speculative pyramids. If I loan you $100,000 to buy a house, that loan is called a mortgage. The collateral for the mortgage is the property. In the pre-financialization era, I held the mortgage to maturity (30 years) and collected the interest and principal. This trickle of earnings from interest was the entire yield on the loan.

In the securitized economy, I divide the loan into tranches that are sold to investors like stocks and bonds. I can "cash out" my entire gain in the present, and then sell derivatives on the securitized debt as a form of "portfolio insurance" to other buyers.

Clever financiers can pyramid security on security and debt on debt, all collateralized by debt on one property.

This enables the generation of vast profits not from producing goods and services but from financial churning. The more debt I underwrite, the more I can securitize and the more debt instruments I can conjure out of thin air.

The key ontological (inherent) dynamic of speculative financialization is that pyramiding credit expansions lead to bubbles which eventually pop, wiping out the phantom wealth created by the bubble.

In effect, the central state's (the Treasury, regulatory agencies and the Federal Reserve) policies of low interest rates, easy money and limitless liquidity sought to compensate for the decline of real income by generating speculative income on a vast scale.

The problem is that speculative financialization only benefits speculators with access to nearly free money and the securitization markets--Wall Street financiers, corporate raiders, hedge funds and other financial Elites. These Elites pocketed immense fortunes but very little of this wealth trickled down to households for the simple reason that there is no mechanism for such a transfer except taxes--and this mechanism is controlled by the central state, which is easily influenced by wealth (campaign contributions, lobbying, etc.)

The Federal Reserve and Federal agencies' solution to stagnating household income was to make every homeowner into a speculator. The Great Housing Bubble of the 2000s was the perfection of this strategy: as every home in the nation was floating higher in valuation as the result of an enormous credit/financialization bubble, homeowners were granted a form of "free income" via home equity lines of credit (HELOCs) and second mortgages.

That this increase in home equity was a form of phantom wealth that would necessarily vanish was not advertised as being an intrinsic feature of the solution.

In the wake of the implosion of the housing bubble, the Fed and other central state agencies acted to repeat the exact same strategy of inflating speculative bubbles in widely held assets: stocks, bonds and real estate.

The problem with these current bubbles is that the assets are no longer widely held enough to compensate for stagnant household income. Few households directly own enough stocks and bonds to push the needle of income higher, and the Fed's policy of zero interest rates (ZIRP) has actually deprived middle-income households with savings of hundreds of billions of dollars in interest that once flowed into household coffers.

This elimination of low-risk interest income in favor of risky speculative credit/asset bubbles has led to a monumental misallocation of capital and the institutionalization of perverse and highly corrosive incentives. The policy of incentivizing speculation as the mechanism to compensate for stagnating earned income has been a disaster for households and the nation.

Needless to say, the current bubbles in stocks, bonds and real estate will implode, and the phantom wealth that the bubbles temporarily generated will vanish.


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Fri, 01/24/2014 - 10:29 | 4362451 SoilMyselfRotten
SoilMyselfRotten's picture

Speculate this!

Fri, 01/24/2014 - 10:29 | 4362454 negative rates
negative rates's picture

End and fuck the Fed!

Fri, 01/24/2014 - 14:25 | 4362653 Boris Alatovkrap
Boris Alatovkrap's picture

Ivory tower economist is creative describe economic event, but "Stagnation" has only one cause,

Trust is disintegrate.

Not solution by print more money, not solution by lower interest rate, not solution by distribute more wealth, but is time seize bankster-robber and complicit member of political class, and demand justice according to rule of law.

Fri, 01/24/2014 - 10:53 | 4362539 Handful of Dust
Handful of Dust's picture

"You didn't speculate that!"

Fri, 01/24/2014 - 10:30 | 4362458 TeamDepends
TeamDepends's picture

Our solution:  End the Fed.

Fri, 01/24/2014 - 10:54 | 4362538 Hippocratic Oaf
Hippocratic Oaf's picture

It's ok, we'll just get one of those many shovel-ready jobs.


Fri, 01/24/2014 - 11:31 | 4362663 Boris Alatovkrap
Boris Alatovkrap's picture

After 5 year of Barry Boy King fiat handle economy, many shovel-ready job is create... all involve removal of excess accumulation of bovine excrement in Washington, capitol.

Fri, 01/24/2014 - 10:31 | 4362467 101 years and c...
101 years and counting's picture

When this bubble pops, then what?  The clueless twit bitch is going to lead the US out of the debacle?  Not a chance.  Once this bubble pops, the depression will finally be realized.....

Fri, 01/24/2014 - 10:33 | 4362470 Bangin7GramRocks
Bangin7GramRocks's picture

Bullshit! My shineboy says his tips are a sure thing.

Fri, 01/24/2014 - 10:34 | 4362474 RaceToTheBottom
RaceToTheBottom's picture

Why worry about risk when you can offload it to Fanny/Freddy?

Risk is for taxpayers....

Banks don't do risk

Fri, 01/24/2014 - 10:36 | 4362477 dick cheneys ghost
dick cheneys ghost's picture

synthetic debt.....another example of american exceptionalism

Fri, 01/24/2014 - 10:41 | 4362488 One And Only
One And Only's picture

All debt is a derivative of future productivity. In a sense, aquring debt is a lot like writing a call option on your future productivity - or synthetic productivity.

It is not exlusive to America.

Fri, 01/24/2014 - 12:10 | 4362811 Harbanger
Harbanger's picture

Socialist states always end up borrowing from bankers to maintain their inefficient govt systems. Most people forget that the Soviet Union collapsed from financial debt.  They had to fork over 100 tons of Gold to the IMF as security for emergency loans.  Here's a 1991 LA Times arcticle describing this,

Fri, 01/24/2014 - 12:36 | 4362961 Flakmeister
Flakmeister's picture

Remind us what Debt to GDP for the real socialist states, e.g Sweden and Denmark...

Playing semantics whilst claiming the USSR was a modern social democracy is disingenuous at best and only show that you have no interest in understanding what is actually going on in the world...

Fri, 01/24/2014 - 13:01 | 4363116 Johnny Cocknballs
Johnny Cocknballs's picture

it's about 43% for Sweden.  What's your point here?  I'll agree that applying "socialist" to the USSR vis a vis Sweden doesn't make much sense, but I think the point being made regards centralization/government planning of the economy, semantics about what "socialism" really means aside.  No?

Fri, 01/24/2014 - 13:10 | 4363147 Ghordius
Ghordius's picture

Johnny, not everybody on ZH uses the "socialist" label in a commonly comprehensible manner. BTW, I have another example to disprove that theory: Romania under the dictatorship of Ceaucescu. A communist regime that paid all of it's sovereign debt back. A very expensive way of telling the IMF... "Fuck You"

Fri, 01/24/2014 - 13:15 | 4363185 Harbanger
Harbanger's picture

So, can we say Romania is a good example of Socialism?

Fri, 01/24/2014 - 13:23 | 4363220 Ghordius
Ghordius's picture

I'd hazard to say that most self-declared socialists would say that Old Nick was not a good socialist, or perhaps even no socialist at all

believe it or not, I'm an old Cold Warrior. I hated and did my (little) part against Communism and the Iron Curtain. yet I studied my enemy

a good example of Socialism? LOL. perhaps China in the last 20 years...

Fri, 01/24/2014 - 13:24 | 4363221 Johnny Cocknballs
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Solid point.



Fri, 01/24/2014 - 15:54 | 4363881 Dr Benway
Dr Benway's picture

You all have some good points here. I agree that the term 'socialist' is egregiously misused on ZH, largely as a childish pejorative.


But any discussion of debt levels must include private debt, because in a world with TBTF banks, private debt in effect IS public debt too. The Nordic countries look less rosy if you look at total debt, and will look even worse when the accompanying property bubbles burst.

Fri, 01/24/2014 - 13:05 | 4363139 Harbanger
Harbanger's picture

Over 70% of their GDP is service industry.  Did you forget their financial crisis of the 90's?  The Swedish Model"they previously had, proved not to be sustainable in the long term.  Now their ability to continue to finance their welfare state is tied to the fate of the EU.

Fri, 01/24/2014 - 13:14 | 4363182 Ghordius
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which "fate of the EU"? the org in Brussels? the treaties? the free trading zone? meanwhile Sweden is cutting back on welfare since years

Fri, 01/24/2014 - 13:21 | 4363204 Harbanger
Harbanger's picture

Yes, The fate of Brussels that's hinging on being financed by the Fed.  They had to cut their spending in the past because it was unsustainable, it may still be unsustainable, I would like to see them separate from the EU.

Fri, 01/24/2014 - 13:33 | 4363248 Ghordius
Ghordius's picture

completely wrong. I presume you are talking about the Big Trillion Swap between the FED and the ECB. nothing to do with the EU, btw, that's a different club

first, the swap was reversed not long ago. second, it was made so that the FED could bail out the American biz of big megabanks, including "europe based" ones. you know, US Mortgage pyramids that had to be phased out of their humungus leverage, causing an immense short-term need for USDs

buddy, we europeans are net payers/contributors to the American Dream since 1946 and even more blatantly after 1971. and I'm telling you this as an ally and friend

Sweden out of the EU? well, do the Swedes want to?

Fri, 01/24/2014 - 13:47 | 4363301 Harbanger
Harbanger's picture

"buddy, we europeans are net payers/contributors to the American Dream since 1946 and even more blatantly after 1971."

Keep your knickers on buddy. The American dream is only that yall learn to love each other.  European net Payers to the US in what way? war reperations?  Marshall plan?

Fri, 01/24/2014 - 15:03 | 4363656 Ghordius
Ghordius's picture

yes you are pointing to half of the reason why we did it. The Marshall plan (the other being the Soviets). And we opened all our borders for all things American, remember? As part of the payment for it. Another part being a decades long support of a trade imbalance, in form of empty ships and Treasury Bonds coming back to our shores

have you never wondered how it comes that in the 50's and 60's the US was able to shrink it's budget, shrink it's debt, enjoy a huge expansion of it's companies and everybody was able to afford a (leveraged) home? new markets. new buyers of USTs

check on the Marshall Plan's money again. how much did the US Taxpayer really have to pay? how much profited American companies from Hollywood to Disney to Coca Cola to whatever?

I don't expect you to believe me. But you can check on your assumptions and my little claims. From 1946 to 1971, for example, you can even make the gold-backed calculation.

Fri, 01/24/2014 - 13:36 | 4363257 alangreedspank
alangreedspank's picture

"Real socialist" states appear so only to outsiders, like you. Otherwise, they are your plain ol' mixed economies with areas that have more, or less freedom than your non-scandinavian model countries depending on the situation you are looking at. You may pay less income tax in the US, but Swedes have school vouchers, for example.

They were "truer" socialist countries back in the 50-70s. They cut back quite a bit since, but you still have mandatory military service...

Fri, 01/24/2014 - 13:50 | 4363309 Flakmeister
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Really, please give examples of "truer" socialist contries in the 50s-70s...

Command economies of the Soviet mold don't count as "real socialist" states... Those would the social democracies, you know the ones, higher quality of life, higher happiness by any meausure, and of late those having significantly higher economic freedom than the U.S.. Do you need to google it for you too?

BTW, just because a Fascist state has a few "social" perks like Social Security doesn't make it a socialist state (Big S or little s).... 

Fri, 01/24/2014 - 14:11 | 4363410 alangreedspank
alangreedspank's picture

Scandinavian-model countries were more socialistic back in these times (50-mid 70s) than they are now is what I meant.

And socialism does not mean "good outcomes". ie: "The USSR was not a good experiment, therefore, not a socialist country" is wrong. It just means state ownership. The word itself does not entail good, or bad outcomes.

Fri, 01/24/2014 - 14:14 | 4363427 Flakmeister
Flakmeister's picture

Now we are on to something...

Hate to break it to you but Socialism is not the equivalent of "state ownership"...

BTW, just how were they "more" socialist back then?

Fri, 01/24/2014 - 16:05 | 4363916 Dr Benway
Dr Benway's picture

He's absolutely right, you know. Fiscal difficulties lead Sweden to cut back many of its welfare programs in recent years, there has been privatization, a center-right government is in power and so forth.

(I generally think you have good points though, Flakmeister, and I didn't downvote you if you care about such things.)

Fri, 01/24/2014 - 21:13 | 4365114 alangreedspank
alangreedspank's picture

I didn't either!

Fri, 01/24/2014 - 10:38 | 4362481 Cursive
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It's worse than CHS estimates.  It would be fine if the money were sound, but it's not.  It matters nothing if individual investors/speculators lose the value of their debt or equity "investments," but the lifeblood of our economic activity is the currency.  Unfortunately, the Fed has put it all on red in one last gamble at the craps table....

Fri, 01/24/2014 - 10:39 | 4362486 Seasmoke
Seasmoke's picture

Think red is the roulette wheel. 

Fri, 01/24/2014 - 10:44 | 4362499 Cursive
Cursive's picture


Thx.  I'm in the middle of a polar vortex and you want me to stay coherent?  Nothing like a mixed metaphor to really drive home the point!

Fri, 01/24/2014 - 10:37 | 4362482 Spastica Rex
Spastica Rex's picture

Tax land.

Fri, 01/24/2014 - 10:45 | 4362505 Oldwood
Oldwood's picture

Tax productivity. That should really make things "go".

Fri, 01/24/2014 - 10:39 | 4362490 Flakmeister
Flakmeister's picture

The real problem with financialization is that it enabled demand to be brought forward and new organic demand is dead... You know, that limits to growth thingie...

Ask Uncle Miltie if he still thinks greed is a beneficial driver of macro economics...

Fri, 01/24/2014 - 10:47 | 4362510 One And Only
One And Only's picture

The REAL problem is not debt per se but the misuse of it.

If I own a company and borrow money (debt) to buy new machinery to help my business grow... well, that's good.

If I run a country and borrow money (sovereign debt) to pay voters to sit at home and collect welfare entitlements...well, that's a bad thing.

The FED ultimately is responsible for creating the inefficiencies like long-term UE, disability recipients, and income inequality. After all - debt =money and the FED has a monopoly of both.

Fri, 01/24/2014 - 10:51 | 4362524 Spastica Rex
Spastica Rex's picture

I guess free will is a bitch, after all.

Don't tell me how to spend my money.

Fri, 01/24/2014 - 11:32 | 4362665 Flakmeister
Flakmeister's picture

So are you claiming that the "welfare state" is responsible for the current American fiscal situation? If so, could you point to any source that supports your claim by breaking down the expenditures?

BTW, it is news to me that the FED has any say in long term UI benefits...

Did it occur to you that that there is currently to much idle capacity worldwide and the the world economy is getting squeezed by oil prices (the sector where all that money being thrown at it is incapable of increasing production capacity) 

Fri, 01/24/2014 - 11:38 | 4362686 Oldwood
Oldwood's picture

Surely not! Just because a huge number of Americans are being paid to sit at home, have kids and buy crap online, should never be construed as anything but positive for the future of our country. We really, really care now, don't we. Onward utopia, where we are free to pursue our love of the arts while not having to worry about things like food, shelter and HEALTHCARE. We have rights now!

Fri, 01/24/2014 - 11:49 | 4362730 alangreedspank
alangreedspank's picture

"Idle capacity" is a government construct. It assumes the resources are perfectly in line with what the market needs, but somehow, just don't do much, but really should.

Obviously, that can't be the case after a bubble burst (bubbles burst because of misallocation of resources going on for too long) and while governments are making sure resources are not being reallocated, and repriced.

Fri, 01/24/2014 - 12:40 | 4362992 Flakmeister
Flakmeister's picture

Do you actaully believe the nonsense you just wrote?

Remind us of what global car manufacturing capacity is? How does that compare with demand?

Fri, 01/24/2014 - 13:17 | 4363197 alangreedspank
alangreedspank's picture

I think my "nonsense" that I "actaully" wrote is actually answering the last paragraph of your sentence. Your inability to process data != nonsense.

Read it again, and let it sink in.

Fri, 01/24/2014 - 13:56 | 4363340 Flakmeister
Flakmeister's picture

No, you claim that idle capacity is a gubbmint creation....

That is pure nonsense...

Now if you want to argue that the cleanup of the financial sector was botched and TARP was the equivalent of a financial coup d'etat, you may be on to something...

Living on the oil plateau changes all the rules... And a lot of people are in denial about it..

Fri, 01/24/2014 - 11:53 | 4362745 Dingleberry
Dingleberry's picture

the welfare state (like the corporate welfare state ) contributed mightily to our current mess.

There aren't enough zeros in the universe to calculate the cost of liberals gone wild.

Go to any inner city and live there for 5 minutes. See for yourself.

If you dare.

At least liberals get lifetime voters. Too bad those voters will live their lifetimes in misery.


"None are more hopelessly enslaved than those who falsely believe they are free".


Fri, 01/24/2014 - 12:37 | 4362980 Flakmeister
Flakmeister's picture

Dingleberry is perfect for you...

Show me the data that backs your claim...

Fri, 01/24/2014 - 12:42 | 4363005 Spastica Rex
Spastica Rex's picture

You want to see a "lifetime voter?" Go visit a Raytheon factory.

Fri, 01/24/2014 - 13:03 | 4363128 Johnny Cocknballs
Johnny Cocknballs's picture

Are you arguing that medicaid, medicare, and social security aren't the biggest non-d expenditures?


I'm not being snarky {at the moment} but what is your point?

Fri, 01/24/2014 - 13:39 | 4363281 Dingleberry
Dingleberry's picture

Flak.....go to Detroit.

Fri, 01/24/2014 - 14:03 | 4363376 Flakmeister
Flakmeister's picture

So the Liberals created Detroit? 

News to me....

Out of curiousity, when did the metropolitan Detroit population peak? Do you know?

Fri, 01/24/2014 - 12:20 | 4362845 adr
adr's picture

The issue is what is taken out is not returned to those that are productive, instead being wasted on the unproductive.

Out of my monthly pay $1300 is taken out in taxes, more than my mortgage payment. Nearly the entire amount of tax revenue collected by the government is used for entitlement programs. The rest is added to the national debt. You can argue that essential government programs are paid for first, but what do you think will be cut before SS and welfare? I'd even argue that welfare would be paid over the interest on the debt, really the interest on the debt is just paid for with more debt. So I am not receiving any direct benefit and am rewarded with higher tax rates in the future because of the massive deficit spending. I am not a millionaire, I am smack in the middle class. SO every dollar counts.

I pay $575 a month for health insurance. Last month's medical bills were zero. In fact in ten years I've only racked up around $5000 in medical bills and that includes the insanity of $1500 for a couple stitches on my thumb. My total family medical bills in ten years were around $15k. My total premium with the employer paid portion is $1238 per month, almost $15k per year. So the premium paid for one year paid for all my medical expenses for a decade. The other nine years of premiums went to pay for something else I didn't receive. I can think of a lot of other things my company and I would have liked to do with that $130k paid to a health insurance company.

I pay $100 a month for car insurance, $75 a month for home insurance, $50 for mandated flood insurance because there is a river in my town. $200 a month for property tax. That's $425 going out a month for nothing. I've never been in a car accident or made a single insurance claim, yet in twenty years I've paid enough in premiums to pay for a nice BMW 5 series.

All said and done almost $28k is taken out of my pay every year in direct taxes and insurance alone. More than what 60% of Americans make in a year. That doesn't include sales tax or taxes on phone, gas, etc. I almost don't get anything in return for that $28k and I could think of a million things I could do that would make better use of that money.

I'll never get back what I pay. I am a person that pays for other irresponsible people and other people's problems. The funny thing is that if I took a pay cut to $25k I'd be eligible for just about every welfare program. Much of what I spend money on would be cut or subsidized. In the end I'd probably have more disposable income making $25k a year than the $65k I make right now. That is insane.

Fri, 01/24/2014 - 13:31 | 4363240 Flakmeister
Flakmeister's picture

Making shit up does not help your case...

Nearly the entire amount of tax revenue collected by the government is used for entitlement programs.


Sat, 01/25/2014 - 01:18 | 4365762 Johnny Cocknballs
Johnny Cocknballs's picture

Flak, you might actually look up the numbers yourself [or click on a link now and then].


By my definition, 55% of spending is on what may be called either entitlement or welfare programs {and I'm not myself opposed to some safety nets, they just need reform, but I'd cut .mil first and second]

Given that the government borrows about 30% of what it spends, it is fair to say that most  of the revenue collected goes to entitlement/welfare.  There's simply no question about it - "nearly all" overstates it, but if anyone's "making shit up" it's you.

Fri, 01/24/2014 - 13:59 | 4363361 nightshiftsucks
nightshiftsucks's picture

You might not have used your insurance like me but then again the other day i turned wrong,broke both bones in my lower leg and get surgery next week.I guess thats why they call it insurance.

Fri, 01/24/2014 - 10:55 | 4362545 zaphod42
zaphod42's picture

"Ask Uncle Miltie if he still thinks greed is a beneficial driver of macro economics..."

Uncle Miltie is dead; so is St. Ronnie (the Wrong), and the "Fresh Water" school of economics.

Also dead (on arrival no less) is the "Salt Water" school of economics.  Economics is like Astrology; economics Nobel Lauriets are psychics.  Not even as good as weather men.

They're all guessing!  Same as me.  Same as you. 

What we know is that this is NOT going to end well. 



Fri, 01/24/2014 - 13:33 | 4363253 Flakmeister
Flakmeister's picture

Economics is the continuation of ideology by other means....

What Miltie blessed was a financial crusade that was the equivalent of killing in the name of Christ.... 

Fri, 01/24/2014 - 11:17 | 4362616 centerline
centerline's picture

+1, I have long said that organic growth died along time ago.  More specifically, it failed to produce necessary yield and has been collapsing ever since.  At this point we are almost entirely dealing with synthetic yield... recursive profits based on the illusions of endogeneous money creation.

Fri, 01/24/2014 - 11:23 | 4362639 alangreedspank
alangreedspank's picture

it enabled demand to be brought forward and new organic demand is dead

What you are describing is basically the extending of credit. A good or service now has more value than the same good or service in 5, 10, 20 years so that is what rates are, the difference in price between those two same goods. Thing is the price of doing such was tempered with and IMO, allowed for too much consumption using this mecanism instead of production.

Fri, 01/24/2014 - 13:39 | 4363280 Flakmeister
Flakmeister's picture

The price was not tampered, bonds were in a secular bull market post Volcker crushing inflation brought about by the first oil shock (along with Nam) Falling rates allowed an expansion of the balance sheet by allowing increased leverage... i.e. you could get moar for the same cost of carry...

Securtization greatly expanded the pool of funds that could be tapped....

Fri, 01/24/2014 - 14:00 | 4363364 alangreedspank
alangreedspank's picture

The Fed does not exactly set rates, but it certainly influences them greatly through its primary dealers who have to make a market for the Fed  (ie: if we buy, you sell, if we sell, you buy and that, for every OMO we perform) to be part of that club. Agreements made with other central banks also have to be taken into account when gauging how much clout the Fed has on rates.

Fri, 01/24/2014 - 14:08 | 4363396 Flakmeister
Flakmeister's picture

Well, it used to work like that, at least in theory, until 2009 or so....

What exactly is your point?

Fri, 01/24/2014 - 10:43 | 4362495 Oldwood
Oldwood's picture

When we are unable or unwilling to find work, the life of a gambler gains appeal. Everything this government has done is to appeal to our weaknesses and base instincts, using the result as an excuse to take more power. We want to be treated as adults but they are making it easier and easier to behave as spoiled children. I want it, therefore I deserve it, which means receipt with the least amount of effort or responsibility. And we might as well sit back and enjoy a little weed while we wait. The willing denial of reality will enable our doom. But I guess as long as we never see it coming, all is well, right. The sheep never really understand whats happening to them until the pin impacts their brain, and probably not then either. Ignorance is bliss.

Fri, 01/24/2014 - 10:44 | 4362500 Johnny Cocknballs
Johnny Cocknballs's picture

This is the best stuff I've seen from Mr. Smith and I largely, some quibbling aside, agree with his assessments. 

"I can "cash out" my entire gain in the present..."

This is huge.  And it calls into question, or at least should, a system wherein privately owned banks conjure fiat into existence as a loan at interest to people who have to actually do productive work to earn it... and the legitimacy of the debts themselves

What's so funny about peace, love, and debt repudiation.  Surpise, mothafuckas - it ain't going to be repaid.  It can't be.

"The Powers That Be conjured up a solution to these limitations: debt. The central state filled the gap between tax revenues and spending with borrowed money. Companies and households were encouraged to borrow money (i.e. borrow from future income) to spend in the present."

As you know, in our system, growth is measured in terms of debt. Money is debt.  Job "creation" means debt, and economic recovery is not only possible due to deficit spending - it's the only thing that grows an economy.  That this does not seem to be a system which comports with logic, the laws of physics, or the stated social policy goals of progressives doesn't seem to matter.  Our economy got all fucked up on coke, so we decided the problem was we didn't have enough coke.  And thems that get the most can snort it right away - later on, they can be sure Joe Taxpayer will pay, one way or another.


Somewhat off topic, but fuck Paul Krugman. He's just about the only guy I read where I actually feel myself getting angry at his bizarre mix of stupidity and arrogance.

Do any of you boys and girls ever comment there?  I wish some ZHers, with better background in economics per se and polemical skills would crash the ball-washing that seems to constitute 90% of the comments he gets.

I completely fail to understand how Krugman can keep setting up the straw men of "austerity" and deficit fearmongers in an environment in which deficit spending and debt has been going on interrupted for decades.  Am I missing something?  What in the fuck planet has he been on?  How can he continue making these absurd ad hominem attacks and representations that have no basis in the reality-based community?


Fri, 01/24/2014 - 10:49 | 4362518 J J Pettigrew
J J Pettigrew's picture

Krugman and Bernanke....Princeton boys.  The geniouses from the ivy league have done more damage to this country than any other source.

Area codes 202 and 212..... are the epicenter for the ills of this country.

Fri, 01/24/2014 - 13:41 | 4363286 Flakmeister
Flakmeister's picture

Since when was U of Chicago considered Ivy League?

Sat, 01/25/2014 - 01:20 | 4365765 Johnny Cocknballs
Johnny Cocknballs's picture

It's probably a better school than Cornell , Dartmouth or Brown....

Fri, 01/24/2014 - 11:11 | 4362540 Oldwood
Oldwood's picture

Because he tells them what they want to hear. The power of delusion is strong. Don't tell me utopia does not exist. Do not tell me that we can not all have good jobs while buying virtually everything from China. And don't tell me our benevolent government cannot provide the many blessings upon the people of this great country without theft and fraud that will eventually destroy us all. Don't you dare!!!

Sat, 01/25/2014 - 01:27 | 4365787 Johnny Cocknballs
Johnny Cocknballs's picture

What bothers me is that, all else aside, Keynesians have an interpretation of what they think worked 80 years ago and want to 'calque' it on to our modern, non-industrial, warfare/welfare state and economy.  This is just bad science - it isn't science, it's constantly ascribing to correlation the powers of causation, but more chilling is, the "economics" aside {or how it is measured - the map not being the territory} is the state fetishism Krugman and his disciples represent. A fetishism which really represents their desire to force other people to do what they think they should with their labor, property, and values.

I find them far more dangerous than the right wing - all the more because in their myopia and arrogance they think they are the side that represents moral and social progress rather than centralization of power and wealth, and the prison rape of the Constitution and its limits on government power.


I wish I saw more negative comments in Krugman's column from the likes of some of the smart folks here.  And typing "fuck Bernanke" doesn't really do it.

Fri, 01/24/2014 - 11:13 | 4362605 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Our economy got all fucked up on coke, so we decided the problem was we didn't have enough coke.  And thems that get the most can snort it right away - later on, they can be sure Joe Taxpayer will pay, one way or another.

Nail on the head.

The current 'leaders' aka heads of banks and finance firms pretty much all came of age when this was all the rage.

I do coke

So I can work longer

So I can earn more

So I can do more.... coke

So I can work longer

So I can earn more

So I can do more coke


I'm always chasing rainbows (as they keep spinning around in circles faster and faster as they spiral down the drain)


Fri, 01/24/2014 - 13:40 | 4363283 tvdog
tvdog's picture

What's so funny about peace, love, and debt repudiation.  Surpise, mothafuckas - it ain't going to be repaid.  It can't be.

My hero <3 - here's a wet, sloppy kiss to go with that up arrow!

Fri, 01/24/2014 - 10:54 | 4362508 J J Pettigrew
J J Pettigrew's picture

Debt is Future Consumption Denied. The world has been subject to a Ben Bernanke cattle drive in which the herd has charged into historically low yielding debt instruments and dividend stocks. Misallocation indeed. The Cypriot suggestion that there be a 10% tax on deposits met outrage. Yet the savers in this country have had 2% shaved off their savings for 5 years now....(equivalent outcome). Those were the sheep. It is time for the cattle to be slaughtered.

"the Fed's policy of zero interest rates (ZIRP) has actually deprived middle-income households with savings of hundreds of billions of dollars in interest that once flowed into household coffers." Exactly.

The saver, with a fair return on his money becomes an economic engine of consumption.  This money, this fair and historical return, has been taken by the government in the form of low cost debt creation and ripped from the hands of the saver.  If there was a fair return on money, the velocity of money would erupt......imo

The Fed's mandate says maintain "moderate interest rates".  ZIRP is NOT moderate by any metric.

Fri, 01/24/2014 - 11:11 | 4362553 Oldwood
Oldwood's picture

When we find ourselves living off of the earnings from our future, what will we live on when we reach that future? Our only choice will to spend the future earnings of future generations. When this becomes fully understood and transparent, the shit will end. Until then, can I interest you in buying my future earning when I'm 105?

Fri, 01/24/2014 - 12:32 | 4362660 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

As they say no taxation without legislation well since they aka the FED are a 'private' corporation allows the government to get around that. They did just that to everyone steathly for the past 100+ years now. It is called inflation (not controlled by the open market based on monetary metal value) and eroding of purchasing power of money for the an equivalent amount of goods as prices increase.

Take the 1932-1964 Washington silver quarter. It's face value today is still $0.25 and is legal tender but it's purchasing power has been reduced stealthly through the years and what a quarter in general will buy.

Up until 1964 we still had a silver standard for coins and paper aka silver certificates. So up until 1964 the real value of that coin was the value of the content of the silver in it which 90% sillver. So at todays spot price of $20.17 the scrap value is worth $3.64. A quarter minted in 1961 if we were still on a silver standard would buy $3.64 worth of goods and services in today's world compared to any quarters minted after 1964 which will only buy $0.25 worth of goods and services. They robbed you of $3.39 of purchasing power for every quarter earned. And it gets worse since if you happen to find one of them old quarters and go to use them as legal tender they will only honor $0.25 in purchasing power for it as legal tender.

To take it a step further concerning minimum wage. Should minimum wage be raised?

Take 5 of those 1932-1964 Washington silver quarters. That was minimum wage in 1961. So minimum wage in 1961 if we never left the silver standard and kept mimimum wage at $1.25 today would be able to purchase $3.64*5 = $18.20 in goods and services while today's minimum wage of $7.10 only purchases $7.10 in goods and services. Inflation has taken away 256.33% of a minmum wage earner's equivalent purchasing power compared to a minimum wage earner in 1961. And they want to raise minimum wage to $10.xx to fix the problem. So raising it to for arguments sake to $10.75 only reduces the stealth inflation tax rate from 256.33% to 169.30%.

Should we raise minimum wage or restore money to some sort of metal standard. Which one holds it's purchasing power better and which one benefits the most wage earners including mimimum wage across the board at the same time?

Inflation is purchasing power taxation without representation when perpetrated by a private corporation aka the Federal Reserve with government's consent in relation legal tender. We rebelled against the crown over this sort of thing.......

Fri, 01/24/2014 - 12:33 | 4362944 JR
JR's picture

“The  Mint is considering a change to the mix of metals it uses to make quarters, dimes and nickels, because of the climbing cost of production of the coins. reports WSJ.

“It now costs 1.8 cents to make a penny and 9.4 cents to make a nickel, costing the federal government about $104.5 million last year.” – Robert Wenzel, Economic Policy Journal (January 22, 2014)

Fri, 01/24/2014 - 12:48 | 4363051 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

You can go back to a silver standard very easily without coinage by issuing certificates and digital 1 and 0s equivalents to paper certificates (this where cryptocurrency techniques come in to keep everyone honest in terms of issuing too much or too little at a whim).

There is enough silver in the world to reissue a new US or foreign if anyone wanted to do so, Silver always has been currency somewhere in the world unlike gold, gold is really better suited as collateral not as a backing for actual currency that is used in everyday transactions because of it's scarcity.

Fri, 01/24/2014 - 13:02 | 4363120 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Keep stacking them nickels and pre 1982 pennies. Best easily accessible long physical metal investments out there especially once they change those base metals and pull all the old coinage out of system. You are going to see the cost of copper and nickel be manipulated upwards after they melt down and seperate metals from the coins to sell back on the open market.

Fri, 01/24/2014 - 13:58 | 4363013 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

To take this a step further the stealth inflation tax rate using the 1932-1964 Washington Silver quarter as peg for the currency value is the following in todays wages.

For every quarter earned purchasing power is reduced by 1456.00%

So if you are earning minimum wage rounded up to $7.25 the real inflation purchasing power stealth tax rate is 1456.00% (($3.64*29)/$7.25)*100 in purchasing power reduction.

If you earn $50,000 it is the same thing ((200000*$3.64)/$50000)*100 = %1456.00

So inflation is a stealth purchasing power flat tax that the FED can raise or lower on a whim without you having any say legally over it and in turn bypassing representation.......

And how does this help the Federal Goverment and their deficits and debt. National debt is approximately 17T. If they have about 1T in cash right now. Having the Treasury issue a new silver standard based upon that 1932-164 Washington Quarter as the peg. That cash becomes worth 14.56T.... That pays down ALOT of debt in one shot.

Fri, 01/24/2014 - 15:21 | 4363421 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Anyone seeing a sleight of hand magic trick going on here through some inverse symmetry of the numbers.

National Debt is ~17T

Silver standard taking in 1T of revenues in todays dollars is ~14T

Difference is 3T

What is the Federal Budget?


How much revenue do they take in to pay for that?


The  $ of the debt load that US actually owes the FED to run the government is only 3T, the FED is monetizing it 100% now the rest is just smoke and mirrors to obfiscate that fact.

That 3T real value if we had a silver standard would be 43.68T. The whole thing is a giant scam with the Treasury and FED playing a giant shell game to hide the fact the Bankers are shuffling the bill back and forth to make it look like it is solvent while we pay the bill. The government is flat ass broke and gave up control to hide the fact they flat out went bankrupt and hide it through an implied default going off the gold standard in 1971.  Anyone get what 2008 was really about now and why the banks got the bailouts to keep the paper ponzi going. It was to protect control an asset they own so we can be used to keep paying down the debt payment payback plan after the US government went bankrupt. You understand why the debt ceiling exists and why it gets set at about value in USD each year based on revenue taken in valued in silver vs. government spending not valued in silver? 100% of taxpayer revenue is going to pay off debt to the silent owner of the US government because they over ran their credit limit and have already went bankrupt not just defaulted. It should be apparent once you reverse engineer the numbers.


Fri, 01/24/2014 - 11:56 | 4362755 JR
JR's picture

Asks Jim Quinn (December 2013)…

Do you think the $10.8 trillion stolen from grandmothers and risk adverse savers was caused by Bernanke’s ZIRP?

Do you think the 8% decline in real median household income since 2008 was caused by Bernanke’s QE and ZIRP policies?  

Do you think the 170% increase in the S&P 500 has been accidently correlated with the quadrupling of the Federal Reserve balance sheet or has Bernanke just done the bidding of his puppet masters?

Was the $860 billion increase in real GDP (5.8% over five years) worth the $8 trillion increase in the National Debt and $3 trillion increase in the Federal Reserve balance sheet?

Was it moral, courageous and honorable of the Wall Street plantation owners to syphon the remaining wealth of the dying middle class peasants and leaving the millennial generation and future generations bound in chains of unfunded debt to the tune of $200 trillion?

And charts the answers.

+100 J J... Very well put, in a nutshell.

Fri, 01/24/2014 - 10:49 | 4362517 Waterfallsparkles
Waterfallsparkles's picture

The best way for most Middle Class and the poor to be speculators, is to buy a Lottery Ticket.

Fri, 01/24/2014 - 10:56 | 4362550 Spastica Rex
Spastica Rex's picture

And just think - some pessimists say opportunity is dead.

Fri, 01/24/2014 - 10:58 | 4362557 Oldwood
Oldwood's picture

Opportunity isn't dead, it simply belongs to someone else right now and it is up to you to figure the best way to steal it. Investing 101...

Fri, 01/24/2014 - 11:24 | 4362642 centerline
centerline's picture

Yup.  "Screw your neighbor" economy.  Funny how moral hazard works.

Fri, 01/24/2014 - 10:58 | 4362554 BuddyEffed
BuddyEffed's picture

It's good to see CHS linking his analyses to the energy issues which are structurally linked to the economy.  The recognition of the underpining of the economy with the physical inputs of energy, metals, etc is where many traditional economists have gotten things wrong.

Fri, 01/24/2014 - 10:58 | 4362558 rsnoble
rsnoble's picture

So if major war breaks out we can expect people that have a mortgage that they can't pay to have banksters who havne't been blown up yet trying to fuck them out of it and if you still have phone service it will be ringing off the wall from collectors in bunkers.  I have no doubts on that.

Fri, 01/24/2014 - 11:01 | 4362563 Sutton
Sutton's picture

We .as a nation, used to be Wealthy.

Now the Fed has given us the Wealth Effect and stolen the actual Wealth.

Fri, 01/24/2014 - 11:05 | 4362579 zaphod42
zaphod42's picture

The real problem with the Fed is that most, excuse the adjective "ignorant", citizens think it is in some way part of the Government, or controlled by Congress or something.  Few realize that it is actually owned by the banks, controlled by the banks, and not in any way interested in the citizens of the USA.  In fact, by egregious use of money, and as "people" the banks influence the Government and Congress in order to maintain their hegemony.



Fri, 01/24/2014 - 11:03 | 4362567 zaphod42
zaphod42's picture

" These Elites pocketed immense fortunes but very little of this wealth trickled down to households for the simple reason that there is no mechanism for such a transfer except taxes--and this mechanism is controlled by the central state, which is easily influenced by wealth (campaign contributions, lobbying, etc.)"

Since real wealth is driven by productivity (labor applied to goods), there is no value added by these people.  Their activity is valueless, and yet they divert money (currency) into their accounts by such means.  There was a time when the productivity added by fossil fuels was sufficient to sustain a vulture class; as these high energy sources become more expensive and less available, the ability to finance debt will diminish/is diminishing.  It is called entropy, and is a physical law of nature.

I like Waterfallsparkles' suggestion.  Lottery tickets:  the retirement plan for the age.


Fri, 01/24/2014 - 12:11 | 4362828 Johnny Cocknballs
Johnny Cocknballs's picture

"Their activity is valueless, and yet they divert money (currency) into their accounts by such means. "

Well said - not only are they presently deriving $ from future productive labor, their own economic activity was nothing more than robbery to begin with.  They got money for nothing, at the expense of future productivity and wise investment.

Fri, 01/24/2014 - 14:18 | 4363440 Flakmeister
Flakmeister's picture

They looted productive assets, exploited existing infrastructure while failing to reinvest in it and pocketed the lions share of the productivity gains while getting a big tax break....

Fri, 01/24/2014 - 11:27 | 4362637 I Write Code
I Write Code's picture

Bernanke, the banksters, and the entier rentier class have stolen the entire fixed income market to use for themselves, and perhaps for (that is, under the cover of) some macroeconomic voodoo.  This pushes small capital into the equity markets which is riskier and so SHOULD return more than ZIRP, so the 2% yield is justified but still tiny in the ZIRP environment.  And if and when ZIRP ends, equity capital takes a major haircut.

(and that haircut risk alone should raise the current yields significantly but does not, and perhaps when I get my PhD in economics I will explain why in detail, something similar, failure of externalized risks to be paid for, caused 2008)

The second point made here is about stagnant wages, which can be summarized as: global overcapacity.  This should be good news, that one billion people working can support seven billion!  But, we have NO allocation system for the non-working six billion if they are not earning by producing, they live on charity, whining, and politics.  Eww.

Welcome to the 21st century. 

Fri, 01/24/2014 - 11:24 | 4362641 TwoHoot
TwoHoot's picture

"This leads to a conclusion that undermines all existing capitalist/socialist models:wages are no longer a practical means of distributing the surplus generated by the economy."

Think about that little bomb for a few minutes.

That it happens to be true makes it hard to take seriously. Reality is a bitch.

Fri, 01/24/2014 - 11:35 | 4362678 JR
JR's picture

If a free enterprise culture produces innovation, then that culture should be a part of the resulting prosperity.  But it isn’t.

Richard Benson of Specialty Finance Group asks the pre-inflation $64 question: "If mankind's machines produce more with less labor each year, why shouldn't the dollar I make this year buy more next year? Shouldn't this increase in productivity flow through to the wage earner and saver?”

Why isn’t it?

We are being robbed.

Adds Benson: “Man is such a lucky creature because machines do all of our work. Our economy and prosperity stand on the shoulders of the geniuses who invented the wheel, lever and plow, and the creative thinkers who dreamed up mathematics, the internal combustion engine, silicone chip and the internet. These innovations have led to wondrous and unforeseen leaps forward for mankind. Human ingenuity, mixed with a desire to do better and produce more with less, has relentlessly driven productivity forward…”

Bankers didn’t do that; that didn’t build that. Free enterprise exercised by free men did that in America, once the patent giant of the world. (In 1997, a study of the inventors honored in the National Inventors Hall of Fame in Akron, Ohio, revealed that 91% of the world’s greatest inventors worked in America and only 9% in other countries.)

Americans’ standard of living should be soaring and reaching the far corners of the globe. The public’s bonus should be its share of its contribution to the productivity of the Great American Dream economy: those benefits should be open to all American citizens, yet they’ve become the sole property of the bankers and the corporations for their sole profits.

Communism did not die with the U.S.S.R. Communism is a program. It is deliberately identified as a Soviet-inspired system, when it isn’t.  Now, all the fears of patriot Americans in the 40s have come true. All the attacks on capitalism and free enterprise and freedom fit their program.

It was the growth of collectivism and coercive central planning and the reversal of the fundamental principles of American life and culture under the banner of the Federal Reserve that transferred America’s wealth to the International bankers and set her down the Road to Serfdom, i.e., on the road to world socialism.

A relatively small group of people, such as Goldman Sachs investment bankers, will continue to take the nation's wealth and redistribute it to themselves until our free society and its worldwide cornucopia of wealth disappears from the face of the earth.  Without personal liberty, there is no economic liberty, and no need for investors.

"When the capitalist is gone," asks Ruth Wilder Lane, "who will manage production? The State.  And what is the State?  The State will be the mass of toiling workers."

Masses of toiling workers do not invest.

Fri, 01/24/2014 - 12:31 | 4362891 monad
monad's picture

Your thinking is unmutual, citizen. You are sentenced to 2 years pennitentiary for this degenerate thought crime. But seeing as your sentence would make you an even more odious burden to your less fortunate comrades than your antisocial mental illness, your sentence is commuted to 2 years indentured parole. Register immediately at the Goldman Sachs My Government® kiosk at your post office and report as instructed to the local kommissar, whose lavish lifestyle you will support through your penance. Hopefully you will learn from this to adhere to the norm and stay on your meds. And if you don't, this transgression is already noted on your permanent record. Our Glorious Leader mayn't be so merciful next time.

Fri, 01/24/2014 - 12:23 | 4362881 yogibear
yogibear's picture

The Fed is out of bullets. All they can do is greater and greater amounts of QE or something like it to encourage hyper-speculation which will eventually result in the  largest economic crash in history.

Fri, 01/24/2014 - 13:21 | 4363161 Johnny Cocknballs
Johnny Cocknballs's picture

The best way for the ultra-wealthy to own even more of the nation is to make the crash as big as possible.

All those "Russian" oligarchs bought Russia out from underneath the Russians under Yeltsin - what was bad for most people was great for speculators and those who could call their international friends to buy assets for pennies on the dollar.


It's all being done on purpose.  I keep waiting for that Rumsfeldian moment where someone lets slip that the plane was shot down, and admits that its all being done precisely to allow the .01% to buy even more real assets for pennies on the dollar.

Fri, 01/24/2014 - 13:51 | 4363313 JR
JR's picture

Michael Piper corroborates your points, Johnny.

“The truth is,” writes Piper in AFP this week, “if Americans want to get back to good old-fashioned Americanism—however defined—we do need to go the way of Russia and find a leader like Putin.”

Why? He is turning the tables on Russia’s rapacious oligarchs.

Says Piper: “What’s happening in America recalls what happened in Russia in the wake of the collapse of the Soviet state. A handful of greedy vultures grabbed control of the Russian economy and the political apparatus arising from the remnants of the Communist Party super structure that dominated the USSR for some 75 years.

“Hardly more than 10 in number, these so-called ‘oligarchs’- most of them Jewish, not ethnic Russians – became the new ruling class in Russia. Preying upon the Russian people, they looted the economy and bought control of the nation’s media, reigning supreme, cooperating with the interests, in the West, of the Rothschild dynasty.

Here in America things are little different…

But, said Piper, in Russia, Vladimir Putin turned the tables on these “kings of the kleptocracy,” although they “still control 70% of the Russian media.”

Or, as David Stockman put it: The Federal Reserve needs “a sweeping housecleaning.”

Fri, 01/24/2014 - 16:41 | 4364108 Flakmeister
Flakmeister's picture


A Putin apologist....

Sat, 01/25/2014 - 01:31 | 4365793 Johnny Cocknballs
Johnny Cocknballs's picture

Putin is a white hat, without doubt, relative to the Yeltsin era oligarchs. Have you read anything, seriously, about how they got their wealth?  Irrespective of their ethnoreligious background, indeed quite irrespective, you should find them to be utter cunts.  In that regard, Putin has actually been a virtual saviour to Russia and the Russian people. This doesn't mean he is above criticism - but for goodness sake, their democracy is 20 years old and constantly facing Western efforts to undermine them...  whereas we are rapidly shedding democracy in order to fight "terror" concocted mostly by the American "deep state" and it's Israeli fellow travellers.

Fri, 01/24/2014 - 14:53 | 4363604 Winston Smith 2009
Winston Smith 2009's picture

CHM with a beautifully clear and concise explanation of the game being played.  Excellent.

Do NOT follow this link or you will be banned from the site!