The Five-Year Fantasy Is Ending

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Since these monetary/fiscal fixes (i.e. distortions) didn't address the real issues, all they can possibly do is increase the magnitude of the next collapse.

For five long years, we have pursued the fantasy that we could return to "growth" without having to fix or change anything. The core policy of the fantasy is the consensus of "serious economists," i.e. those accepted into the priesthood of PhD economists protected by academic tenure or state positions: what we suffered in 2009 was not the collapse of leveraged crony-state financialization but a temporary decline of "aggregate demand" and productive capacity.

The solution, the economic witch doctors asserted, was simple: replace temporarily slack private demand with government-funded demand (deficit spending) and flood the impaired financial system with liquidity (i.e. free money) and increase the incentives to borrow money.

In other words, the "serious economists" solution was to transfer all the interest earned by savers to the banks and push households to buy more low-quality junk from Asia on credit. This expansion of demand (for more of anything-- "serious economists" don't differentiate between a 13th pair of shoes and a single replacement pair of shoes--and they absolutely love building McMansions in the middle of nowhere) would push businesses to borrow money from banks (that's good because banks will profit, and "serious economists" want banks to skim enormous profits to keep the financial sector healthy) and expand their production and payroll.

None of this made any sense, of course, because the "serious economists" completely misread the problem. The key characteristic of science is predictable, repeatable results. Yet "serious economists" failed to predict both the 2008 global financial meltdown and the failure of their Keynesian Cargo Cult policies: zero interest rates, limitless liquidity and pushing households and enterprises to borrow more money.

There is simply no way this track record justifies economics as a science. It is at best a pseudo-science. The number of astrologers who predicted the 2008 crash far exceeds the number of "serious economists" who did so, yet the priesthood still claims the mantle of science.

Add the fallacies of "serious economists" to the resistance of the Status Quo to any reduction in their skimming operations and you get the fantasy that the only solution needed was to print trillions of dollars and give the dough to government and financiers. Five years on, "growth" has been extremely anemic, and no honest observer can deny the reality that the "recovery" is so fragile and dependent on free money that any normalization--raising interest rates, ceasing Federal Reserve quantitative easing and reducing the Federal deficit to $200 billion from $600 billion--would instantly toss the economy into a deep recession and trigger a collapse in stocks and bonds.

Absolutely nothing was done to address the structural causes of the meltdown and the erosion of the middle class and upward mobility. Was anything done to reverse the soaring costs of higher education? No--the crisis was papered over by the Federal government taking over much of the student loan debt-serf industry. You call this a solution?

How about financial reform? What exactly did the 2,319-page monstrosity of corrupted Federal power, the “Dodd-Frank Wall Street Reform and Consumer Protection Act" actually accomplish? Did it abolish the 'too big to fail banks" or did it simply enable them to prosper at the expense of the consumer?

What If We're Beyond Mere Policy Tweaks? (February 6, 2012)

How about the 2,074-page Affordable Care Act (ACA), a.k.a. ObamaCare? Did that fix the underlying problems with sickcare? No--it simply created more regulatory distortions and a subsidy for the uninsured to join the bloated monstrosity of sickcare, speeding the bankruptcy of the entire system.

America's Hidden 8% VAT: Sickcare (May 10, 2012)

The jewel in the Keynesian Cargo Cult's crown is the "wealth effect" created by the spectacular rise in the stock market. Nothing like a doubling of stocks to make everyone feel wealthier and more likely to spend, spend, spend--oops, except only the top 5% of households own enough financial assets to even notice.

This spectacular rise is supposedly based on corporate profits, which have soared to new heights. Roughly 11% of the nation's GDP (gross domestic product) is now corporate profits.

Financial sector profits have been equally wonderful:

Compare those spikes to GDP, which has registered a much more modest increase since 2008.

How could corporate profits have soared on such anemic growth? There are several rarely addressed causes.

1. The weak U.S. dollar greatly increased profits earned overseas when stated in dollars. In 2002, 1 euro of profit earned by a U.S. global corporation equaled $1 in profit when converted to U.S. dollars. That same 1 euro profit swelled to $1.60 a few years ago and still garners $1.37 in profit today. That's a 37% premium based not on profits being higher but on currency arbitrage.
Given that most U.S. global corporations earn 50% or more of their sales and profits overseas, this is an enormous factor in rising profits.

2. The Federal Reserve's flood of free money washed over the entire global economy, sparking an orgy of investment and consumption in emerging markets. Some percentage of this flowed to U.S. corporations, which have compensated for weak domestic sales with strong growth in emerging markets.

Both of these conditions are at risk of reversal. The Fed's modest "tapering" of its liquidity flood triggered a near-collapse in the emerging markets, and the U.S. dollar's weakness is based on a rising yen and euro. Given the systemic problems in Japan and Europe, this five-year trend could reverse.

Two other factors deserve mention. Some of these corporate profits result from dodgy accounting, not actual net profit. Much of the rise in stocks can be attributed to corporate buy-backs where the companies borrow billions of dollars for next to nothing and then buy back their own shares, driving share prices higher.

In summary, the five-year fantasy that free money would fix all the distortions and systemic problems is drawing to a close. Why can't the fantasy run forever? The two-word answer: diminishing returns. Handing out subprime auto loans works at first because it pulls demand forward: anyone who wants or needs a new car buys one now, rather than put the purchase off a year or two. Eventually the marginal buyers default and demand falls off, and the distortions cause an even greater collapse in demand and auto loan quality.

This pattern of diminishing return from all the fake fixes can be found in every nook and cranny of the global economy. Papering over structural problems with free money works for a while, but since these monetary/fiscal fixes (distortions) didn't address the real issues, all they can possibly do is increase the magnitude of the next collapse.

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observer007's picture

ok, off topic, but breaking:

MH370 over Maldives?

As multiple nations search for the missing Malaysia Airlines plane, reports are emerging that the plane was spotted by some people near the Maldivian islands.

Theory of Diego Garcia??


jbvtme's picture

there are few meaningful jobs being performed in this country: auto mechanic, small scale farmer, construction tradesman...everyone else is faking it: bankers, insurance, teachers, post office, retail brokers.  yet we americans live extraordinarily extravagant lives compared to the rest of the world.  that is because of the petro dollar.  this country bit it after viet nam while abdicating the gold standard. we've been living off inflated realestate and dollars. now we have robots and software and asian slaves toting our baggage. we're going third world in spite of what the algos are saying.

LawsofPhysics's picture

What, no mention of oil rig workers?


q99x2's picture

They know where the jet is. Surveillance satellites track everything in the air down to the size of gnats.

stant's picture

starting to think that this thing going to be the new boogyman to replace binladen. looks like something langly would conjure up which leads me to believe its not them, we will see

dontgoforit's picture

That's the way I read it too.  I'm not sure if it crashed or if it was commandeered, but I have to believe if that plane is still intact, it's sitting in a well-hidden hangar and those 26 Hauwei, IBM, Freescale (and other) IT spymasters are getting leaned-on right about now - by somebody.

Bangin7GramRocks's picture

Is Diego Garcia the new Area 51 for the conspiracy crowd? 

NotApplicable's picture

Ummm... care to provide a more likely candidate as to what group could've pulled off this heist?

seek's picture

The new area 51 is in Puerto Rico.

As far as this goes, Diego Garcia is a military base with a pretty questionable history and a lot of spook connections given its favorable geography.

Spastica Rex's picture

For five long years, we have pursued the fantasy that we could return to "growth."


drendebe10's picture

A big round of applause for the arrogant, narcissistic, lying illegal alien kenyan muslom sociopathic ignoramus fudge packer in chief for making this happen for all of the sheeple.... yeehaa!!!

ebworthen's picture

As my Dad used to say, "Heads will roll".

youngman's picture

People think that the governemnt can create cant...but it sure can spend a lot of money in trying..

NOTaREALmerican's picture

Re:  it cant

Don't tell those of us who lived in the 60's & 70's that.     Wealth is relative to when you die.

The boomers who lived off of (or are living off of) Big-Ag, Big-MIC, Big-Road, Big-Water, Big-Airport, Big-Energy, Big-Ed, Big-House, Big-Fin, Big-OldFart, Big-OldFartHealthcare, Big-AntiDrug, & Big-PoliceState got VERY wealthy off the government.    All they've got to do is die to complete their scam.

overmedicatedundersexed's picture

MSM is hard at work to make all of us think otherwise, green shoots - summer of recovery what is the new catch phrase? Oh stocks at all time highs and employment is not as bad as the numbers say, no in fact the UE rate is very low...why the Fed made it all better than if the FED was never there..thanks to the Fed we survided 2008.

dontgoforit's picture

Very true.  MSM is owned by the 'complex.'  I won't just call it the 'military-industrial complex' as Ike termed it - it is THE COMPLEX: government, banks and all those who ride the high-tide of the dollars they're spewing into the ocean of fiat.  But, I agree with the last paragraph:  the next real crash is going to be a hum-dinger.

PlusTic's picture

sounds like a good reason for ole yeller to add more liquidity...keep printing them treasuries and selling them back to the fed

marathonman's picture

The fantasy is ending?   I thought so five years ago, bought gold and didn't take out loans to buy real estate.  Feeling like a shmuck after 2013 turndown in PM's.  Maybe the fantasy is ending.  Maybe not.  Hedge accordingly.

dontgoforit's picture

We all realize it will end when QE ends. 

Yen Cross's picture

    I can't believe that the Spanish and Italian 10year bonds are within 70 basis points of the u.s. 10year bond. That either shows the absolutely retarded mispricing of risk on Spanish and Italian bonds by yield chasing morons, or the the fact that the debt ridden u.s. has truly become an " Banana Republic!"

gabeh73's picture

This is like many articles at ZH. 15 years ago I would have eaten it up and just been wondering why so many PHDs were intellectually dishonest, or idiots, or aholes or all three. Now that I am 40 and have chosen my career and have three kids...I say the best thing for me is to just announce more QE...100 billion a month would be good for now, maybe grow it to 150 billion a month by 2015 via surprise announcements! I have put myself in a good position to really set up my family well if that were to happen. what will I do if they keep dwindling QE down?  Keep grinding. I'll have a job and survive longer than most. I went to MIT, my wife has a PHD we are chosen worker bees for the tyrant class. Things won't be too good and they will get much worse


I feel sorry for those who don't even have the choices I have. Things are really pretty f'd. Which way will the Fed go in the next 8 months? I cna never be sure, I am pre-disposed they will do what is worst for me personally...which is dwindle QE until I am no longer in position to do anything about it(and seriously benefit) when they choose to have a blowoff again. That is probably the safe bet.

NOTaREALmerican's picture

Re:  we are chosen worker bees for the tyrant class.

The top 20% (roughly) is the support class for the Elysium class.    Works for me as I'm a "worker bee" for them too.

The US is a survival of the fittest society, and a majority of the population has wanted it that way for many generations.    Many of the peasants who are getting screwed realize they are just the inferior class and deserve to die, which is why there's so little complaining.   So, overall, I guess we do have a Representative Democracy because it gave us exactly what the majority wanted.

MickV's picture

The US is not a "representative Democracy", it is (or was) a Republic.

There is not even a "right to vote"  (SEE McPherson v. Blacker, Bush v. Gore). The founders knew that 75% of the population are idiots, and didn't want a "right to vote".

"A Republic if you can keep it." Benjamin Franklin

We couldn't keep it

AmericasCicero's picture

My plan - demolish 40 beers, drink rum, drunk rum, drink rum all day

KidHorn's picture

Our future is going to be Japan. QE will never end. The FED may wind it down and even stop it for a very brief time, but they'll start it up again soon after. Interest rates will never be allowed to be set by supply and demand. The US debt to GDP will pass 200% soon on the way to 300%. The debt won't matter because it will be owed to other governments tha will have gone Japan too. No one will allow anyone to default or panic in any way or else the whole thing falls apart all over the world.

EndOfDayExit's picture

Possibly, but not likely. I sense some external political pressure on the US to stop printing. Why else would they decide to taper the QE ?

Calculus99's picture

90% of economists are employed by banks, big businesses and academia.

Who benefits most from policies like QE? Banks, big businesses and academia.

90% of economists are in favour of QE...


NOTaREALmerican's picture

Anybody living off a Big-GOV scam is if favour of QE, otherwise their scam ENDS.

Know anybody living off of Big-Ag, Big-MIC, Big-Road, Big-Water, Big-Airport, Big-Energy, Big-Ed, Big-House, Big-Fin, Big-OldFart, Big-OldFartHealthcare, Big-AntiDrug, & Big-PoliceState?

QE is what keeps half the population alive.

Bearwagon's picture

Not only alive ... also asleep ...

NOTaREALmerican's picture

What the "moral" people can't comprehend is we're in a new era of infinite compounding bullshit.

wealth = debt ** bullshit

As fantasy = self generating bullshit, that means fantasy results in infinite bullshit.

We already know "Keynesianism" means infinite debt, so that means:

wealth = infinity ** infinity.


LawsofPhysics's picture

Five year? The charts show a pretty clear fantasy going back to 1960. Not a bad "fantasy" ... meh, that which cannot be sustained, won't be...

Carl Popper's picture

I think the fantasy goes back to the late 40's if you will be so kind as to review those charts again.

The greatest financial bubble the world has ever seen. Close to 70 years in the making.

LawsofPhysics's picture

one hell of a fantasy by any standards...

BandGap's picture

Slightly off topic - my silver mining stocks always start to swing up BEFORE silver starts to rise on the market. This happens real time, too.

NuYawkFrankie's picture

RE The Five Year Fantasy Is Ending.

Hence the all-out effort to asset-strip Ukraine - and, for that matter, anywhere else where there might be some loot (including your back-pocket).

I Write Code's picture

I agree with the lede and snark, but not quite the details.  You say the TPTB want us to believe:

what we suffered in 2009 was not the collapse of leveraged crony-state financialization but a temporary decline of "aggregate demand" and productive capacity.

I don't think that is the informed or semi-informed view at all.  "The bubble popped", is the meme.  Only by re-inflating the bubble, not really a good idea, would aggregate demand return quickly to previous levels.

Also, the big excursion in 2008 was caused not by the facts of demand and valuation but by "market failure" and well-intentioned (sic) but misconceived and misapplied "mark to market" rules.  The problem is the quants and rocket scientists did not price in "market failure".  Oops.  THEY SHOULD HAVE done, and SHOULD DO SO NOW.  And once you DO price that in, EVERYTHING CHANGES.

So the real failure now is as it was then, a total failure of the banksters to properly wield their own tools, when it would get in the way of their greed, eagerness to rent-seek on trillions of dollars, and generally to sell out their own long-term well-being for a little "Wolf of Wall Street" excess.

And of course the failure of our "government" to resolve any of this in favor of the people, or even the very survival of the "government" itself.

FreeNewEnergy's picture

Just remember that since accounting rules were changed to "mark to fantasy" in 2009, there is no true price discovery mechanism for anything. Is an ounce of gold really worth $1360? Is a four-bedroom house in NJ worth $400,000?

Find me a reliable guide for price discovery, i.e. an ounce of silver is worth three chickens, or something along those lines, then we'll be able to settle in cash, currency, trade, barter, correctly. For now it's all worthless fiat, so spending it on gold, silver, land, other useful assets is probably the way to go.

Own it outright, without counter-party risk and when the bombs start falling in Ukraine and prices drop on the S&P, then we'll see what's worth what.

(actually, I'd take five six-pound chickens for an ounce of silver right about now, but that's just me)

Best article by CHS in some time. Keep up the good work. Gotta believe we're nearing the end because nothing in the financial markets makes any sense whatsoever. Almost ready to initiate my "short at will" gambit on the stock market. Maybe right after old Yellen's presser tomorrow.

q99x2's picture

Who cares. BTFD

The idea is to slowly starve the populace until they can't fight back. And then to kill them.

 These are the people that burn and blow the faces off of children that we are dealing with here.

Globalists - the most ruthless terrorists the world has come to know.

LooseLee's picture

"These are the people that burn and blow the faces off of children that we are dealing with here.

Globalists - the most ruthless terrorists the world has come to know."


----no, the most cowardly POS ever imagined. They don't do these things themselves---they 'order' others to. This is the essence and definition of a soul-less coward...BTW, BTFD puts you in the same class as them. Get some courage and soul man....

Carl Popper's picture

We can continue to grow if the rest of the world will do their part to deflate and beg for more green pieces of paper in return for sending us real goods and services.

Overcapacity is only a problem for the guy without the reserve currency printer.

Keep printing, Ben. I aint ready yet for the party to end

Professorlocknload's picture

Great article there, CHS!

kellycriterion's picture

It's taxes, it's inflation, it's currency manipulation, it's financial repression, it's government borrowing that isn't borrowing, it's the real crowding, it's capital controls. and the interconnected moving parts of the confiscation/cost shifting games have gone global in a big,big way.

And while you were sleeping the OPM mafias have the senior claims on, ya know, everything. And they have those claims in the stronger than legal, they have them in the reality sense. Let's assume TARP, no trillions in loans from the Fed, what would have been the cost? Very, very, high. In fact Paulson's eotwawki theory can't be disproved.

When you start talking about liquidating corruption, bad investments, waste, in a world where net tax payers are directly and indirectly dependent on rebates.....who knows where the dominoes stop falling.

But here we go again, let's look at one or two parts of the elephant, predict the future, and hope our sins will be washed away by nature.

geno-econ's picture

Watch what happens when confidence in US $ sinks which it must as stimulus and bailouts reach diminishing returns for US, China, EU, Ponzi. As Kissinger pulled rug from under Soviets by siding with PRC in 70's , now Putin will begin bilateral trade relations with China which will erode US $ . Plain and simple, China with huge manufacturing base ( thanks to US multinationals) now needs new markets and Russia has the means to pay for those product imports with oil and gas. In other words, Ruble will have energy backing while US $ is currently highly over leveraged with Fed diluting $ every month by $ 75 Billion. For US multinationals there are no new emerging markets capable of replacing China and they lost their chance for Detate with Russia due to Neocon policies. Also, China with a second large market in Russia will be able to raise export prices to the US further eroding purchasing value of a sinking US $.
Janet Yellen would be wise to keep her resume current and perhaps take Russian language lessons.

smacker's picture

The "serious economists" never learn the lessons of reality.

They remind me of the Paris-based IEA who throughout the first decade of this century were merrily putting up charts showing rising global demand for oil complete with another chart showing rising supply. Miraculously they matched! As if supply was unlimited, completely ignoring Peak Oil and its consequences of constrained supply, higher prices and slower economic world growth.

These buffoons are paid lavish salaries to produce garbage.

kellycriterion's picture

ZeroHero is the theater of all deus ex machina all the time. No one has to do anything. It's the market, it's karma, it's the bad guys self destructing with the pure of heart the last men standing.

If the old fantasy isn't working for ya, try a knew one.